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SMRT Corporation Ltd’s Latest Earnings: A Big Profit Jump and Brighter Days Ahead

Yesterday, public bus and rail transport operator SMRT Corporation Ltd (SGX: S53) released its results for the third quarter of its financial year ending 31 March 2015 (FY2015). The reporting period was for the quarter ended 31 December 2014.

Revenue and profit highlights

Total revenue for the quarter edged up 6.8% from S$293.3 million a year ago to S$313.2 million on the back of broad-based growth across most of the company’s business segments.

SMRT’s revenue stream can be broken down into two businesses, namely the Fare business and Non-Fare business. The former consists of SMRT’s train and bus operations while the latter deals with the secondary stuff like rental revenue, taxi operations, and advertising etc.

For the quarter, revenue for the Fare business grew 4.8% on a year-on-year basis to S$223.2 million while the Non-Fare section enjoyed stronger growth with a 12% increase in revenue to S$90.0 million.

Moving down SMRT’s income statement, nondescript revenue growth had actually led to explosive profit growth as the firm’s expenses had grown at a much slower pace compared to revenue. For the quarter, SMRT’s net profit spiked by 58.4% year-on-year to S$22.5 milion.

SMRT’s Fare business had improved dramatically as it turned its operating loss of S$8.9 million in the fiscal third quarter a year ago into a profit of S$1.9 million. This had been a major contributor to SMRT’s net profit growth.

Meanwhile, the Non-fare business saw a slight 2.8% year-on-year bump in operating profit to S$28 million.

Balance sheet highlights

On the balance sheet front, things aren’t too rosy for SMRT. The land transport operator ended the fiscal third quarter with a cash balance of S$197.4 million and total borrowings of S$859.1 million, representing a net-debt position of S$661.7 million.

The company’s balance sheet has deteriorated significantly since the end of FY2014; back then, SMRT had S$156 million in cash but ‘only’ S$636.4 million in borrowings, representing a net-debt position of S$481 million.

SMRT had borrowed more money to fund investments for future growth; during its latest fiscal third quarter, the company had spent S$111 million on capital expenditures, an increase from S$90 million seen a year ago.

Changes to the strength of SMRT’s balance sheet is where investors may want to keep an eye on.

Outlook & valuation

Looking ahead, there are bright spots in SMRT’s future despite issues with structural cost pressures arising from tightened regulatory standards and heightened operational demands on service, reliability, and capacity.

Firstly, the recent slump in oil prices is beneficial to companies which count petrol as a major cost component. In the fiscal third quarter, SMRT’s energy costs, which constitute 12.2% of total operating costs, and has fallen 7.2% as compared to the previous year.

Secondly, the company has been given leeway to raise fees given that the PTC (Public Transport Council) has approved a maximum 2.8% increase in fare adjustments. This would mean an estimated S$27 million in additional revenue for SMRT although the company has to set aside roughly one-third of that amount for the Public Transport Fund. The fund is indirectly channeled to the needy and elderly to help mitigate transport fare hikes.

Lastly, talks are still ongoing with the authorities with regards to the new public bus industry framework in which the government would become owners of the assets and infrastructure required to run public bus services. The new framework might potentially result in a substantial reduction in capital expenditures for SMRT in the future.

SMRT closed Thursday at a share price of S$1.73. At that price, SMRT is valued at a trailing price/earnings (PE) ratio of 30. The high valuation may be due to investors’ high expctations that SMRT has many things going in the right direction now.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.