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SMRT Corporation Ltd’s Latest Earnings: Racking up the Pain in a Challenging Environment

Public bus and rail transport operator SMRT Corporation Ltd (SGX: S53) released its first-quarter earnings for the financial year ending 31 March 2016 (FY2016).

As a brief introduction for some context later, SMRT’s revenue stream can be broken down into two main components: The Fare business, and the Non-Fare business. The former consists of SMRT’s train and bus operations while the latter deals with the ancillary stuff like rental revenue, taxi operations, advertising, engineering services, and more. (As an example of advertising, look at the banner ads you see in the trains when you take them).

You can also read more about SMRT in here and here. With that, let’s jump right into the transport outfit’s latest earnings.

Financial and business highlights

Total revenue for the quarter grew 7.8% from S$297.1 million a year ago to S$320.3 million. This can be attributed to broad-based growth across the company’s various businesses; revenue for the Fare business climbed 6.0% higher on a year-on-year basis to S$231.6 million while the Non-Fare section chalked up stronger growth with a 12.7% increase in revenue to S$88.7 million.

But higher operating costs pressured the firm with total operating profit declining 5.6% year-on-year to S$27.7 million.

SMRT’s Fare business in particular had a disappointing quarter as its operating losses rocketed  from S$1.1 million a year ago to S$3.8 million. The Fare business had suffered mainly due to higher costs from the Train and LRT (Light Rail Transit) operations.

The company had incurred higher costs in the reporting quarter for the Train and LRT operations to support an expanded and aging network to meet tighter regulatory standards and higher operational demand.

Meanwhile, the Non-fare business saw a healthy overall increase of 5.5% year-on-year in operating profits to S$31.5 million.

All told, SMRT ended the reporting quarter with a PATMI (profit after tax and minority interests) of S$20.1 million, down 10% from a year ago.

Moving on to the balance sheet, this is an area where investors may want to keep an eye on. The land transport operator ended 30 June 2015 with a cash hoard of S$131.0 million and total borrowings of S$827.4 million. This represents a net-debt position (total debt minus total cash) of S$696.4 million, an increase from the selfsame figures of S$674.8 million and S$581.3 million that were seen three months and a year ago, respectively.

Looking at the cash flow statement, SMRT had generated S$40.6 million in operating cash flow. With capital expenditures of S$77.1 million, this gives the transport outfit -S$24.9 million in free cash flow, The relatively better news is that this is stronger than the free cash flow of –S$59.4 million that was seen in the first-quarter of FY2015.

Outlook

In the earnings release, SMRT warned that the “public transport operating landscape remains challenging.” The company expects to see its operating expenses rise as a result of the need to “strengthen performance in rail reliability, maintainability, availability, capacity, and safety.”

Meanwhile, increases in depreciation expenses are also in the cards for SMRT when it renews assets for its ageing systems and expands its fleet under the current financing framework for the rail business. On a brighter note, SMRT mentioned that it is “making progress” with the authorities regarding a new rail financing framework.

In other better news, SMRT’s looking at growth in its bus operations in FY2016. Here are the company’s comments on the progress made:

“SMRT Buses will continue to participate in the tenders under the Government’s new bus contracting model. We will be discussing with the authorities on the contract terms for the remaining bus services beyond the license expiry in August 2016. However, the outcome of these will not have an impact on the results of the Group for the next twelve months.”

With a closing price of S$1.46 on Thursday, SMRT is trading at a trailing price-to-earnings (PE) ratio of 25.04.

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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.