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HOLD (Maintained)

COMPANY RESULTS

SMRT Corporation (MRT SP) FY15: Showing Good Progress But Tougher Tests Lie Ahead Results were within expectations with FY15 earnings improving on the back of increases in ridership and average fares and lower fuel costs. We expect SMRT to face a tougher rail operating environment while its bus operations continue to improve in FY16. Heavy capex and weak free cash flow remain as concerns. We reduce FY16 and FY17 earnings estimates by 13% and 4% respectively. Maintain HOLD with a lower target price of S$1.68. Entry price: S$1.46. FY15 RESULTS Year to 31 Mar (S$m) Revenue Other Operating Income Total Operating Expenses Operating Profit PATMI EBITDA Operating margin (%) Net margin (%)

4QFY15

4QFY14

311.2 19.3 303.3 27.1 20.8 78.6 8.7 6.6

289.5 12.4 280.1 21.9 16.9 67.3 7.5 5.8

yoy % chg 7.5 54.9 8.3 23.9 23.0 16.8 1.2ppt 0.8ppt

FY15

FY14

1,235.5 58.0 1,172.7 120.8 91.0 313.9 9.7 7.3

1,163.9 42.1 1,121.8 84.2 61.9 255.5 7.2 5.3

yoy % chg 6.2 37.5 4.5 43.4 47.0 22.9 2.5ppt 2.0ppt

Source: SMRT, UOB Kay Hian

RESULTS • Despite the good progress made... SMRT’s FY15 net profit of S$91.0m (+47% yoy) was in line with estimates, representing 94% and 96% of our and consensus forecast respectively. Repairs and maintenance costs were 4.7% higher than our expectations, mainly due to the increasing number of trains undergoing scheduled overhaul, an intensified maintenance regime and higher cleaning costs in the group’s train operations. Total revenue outpaced operating expenses as operating and net margins improved by 2.5ppt and 2.0ppt yoy respectively. The fare segment (bus and rail) registered a 4.7% yoy rise in revenue, boosted by higher ridership (+5.1% yoy for bus and +2.6% yoy for rail) and higher fares. • …challenges lie ahead in FY16. Operating expenses increased 4.5% yoy. We expect upward pressure on operating costs to intensify, given that staff costs, repair and maintenance and other operating expenses are likely to increase on the back of an expanded and ageing train network, tightened regulatory standards and heightened operational demands. • FY16 capex to remain high. We estimate capex requirements of S$475m and S$450m for FY16 and FY17 respectively, mainly due to the upgrading of signalling and communication systems for SMRT’s trains as well as for purchases of buses and taxis.

Share Price Target Price Upside (Previous TP

S$1.65 S$1.68 +1.8% S$1.73)

COMPANY DESCRIPTION SMRT Corporation operates the Mass Rapid Transit (MRT) system and Light Rapid Transit (LRT) system in Singapore. The company also provides bus, taxi, charter hire services, and consultancy and project management services.

STOCK DATA GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$m): Market cap (US$m): 3-mth avg daily t'over (US$m):

Industrials MRT SP 1,522.1 2,503.9 1,879.5 2.6

Price Performance (%) 52-week high/low

1mth

S$1.80/S$1.25

3mth

6mth

1yr

YTD

(7.1)

3.1

32.1

4.1

3.5

Major Shareholders

%

Temasek Holdings

54.3

FY15 NAV/Share (S$)

0.60

FY15 Net Debt/Share (S$)

0.55

PRICE CHART (lcy)

SMRT CORP LTD

SMRT CORP LTD/FSSTI INDEX

150 1.80

140 130

1.60

120 1.40

110 100

1.20

KEY FINANCIALS Year to 31 Mar (S$m) Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (cent) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x)

(%)

160

2.00

90

2014 1,164 265 84 62 62 4.1 40.4 3.1 11.9 1.3 5.3 60.0 29.0 7.9 -

2015 1,236 324 121 91 91 6.0 27.5 2.9 9.8 2.0 7.4 77.4 29.6 11.0 -

2016F 1,314 376 145 110 110 7.2 22.8 2.7 8.4 2.4 8.4 94.2 26.8 12.4 114 0.96

2017F 1,396 431 179 137 137 9.0 18.3 2.6 7.4 3.0 9.8 101.0 27.0 14.4 128 1.07

2018F 1,480 486 226 175 175 11.5 14.3 2.3 6.5 3.5 11.8 92.4 30.7 17.1 179 0.98

1.00

80

40 30

Volume (m)

20 10 0

May 14

Jul 14

Sep 14

Nov 14

Jan 15

Mar 15

May 15

Source: Bloomberg

ANALYSTS Bennett Lee, CAIA +6590 6616 [email protected] Andrew Chow, CFA +65 6590 6633 [email protected]

Source: SMRT, Bloomberg, UOB Kay Hian

Refer to last page for important disclosures.

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FARE SEGMENT: TRAIN QUARTERLY OPERATING PROFIT (S$m)

STOCK IMPACT SEGMENTAL BREAKDOWN Year end 31 Mar (S$m) MRT LRT Bus Taxis Rental Advertising Engineering and other services

------------------ Revenue -----------------4QFY15 4QFY14 yoy % chg 159.3 153.5 3.8 2.4 2.5 (1.3) 60.3 51.7 16.6 36.8 34.3 7.3 32.1 25.1 28.1 7.5 8.1 (6.4) 27.5 20.6 33.7

-------------------- EBIT --------------------4QFY15 4QFY14 yoy % chg (2.4) 1.2 n.a. (1.7) (0.5) 233.8 0.9 (4.4) n.a. 5.4 3.8 42.0 19.8 18.7 6.2 4.6 4.4 6.3 0.2 0.8 -67.9

7.6

8.0 6.0

5.0

4.0

3.2

2.9

2.0

1.0

0.4

1.2

1Q FY2014 2Q FY2014 3Q FY2014 4Q FY2014 1Q FY2015 2Q FY2015 3Q FY2015 4Q FY2015 (2.0) (2.394) (4.0)

LRT QUARTERLY OPERATING PROFIT (S$m)

Source: SMRT, UOB Kay Hian

• Rail business likely to face weak growth in FY16. With SMRT recording its first loss for its train operations and extending losses for its LRT business in 4QFY15, we expect a tough operating environment for the group’s rail business in the near term. The rail segment will likely be plagued by a need to increase operating expenses as repairs and maintenance works intensify due to the ageing rail system. In addition, we expect revenue from the rail operations to grow slower (+3.5% yoy) than the group’s bus (+11.3% yoy), taxi (+7.5% yoy), and rental (+13.4% yoy) operations in FY16. SENSITIVITY ANALYSIS OF SPECIAL DIVIDEND PAYOUT TO ASSET PURCHASE AT VARIOUS P/B AND PERCENTAGE OF DEBT REPAYMENT. Special Dividend Payout Per Share (cent)

Percentage of Debt Repayment (%)

10.0

0.5

1Q FY2014 2Q FY2014 3Q FY2014 4Q FY2014 1Q FY2015 2Q FY2015 3Q FY2015 4Q FY2015 (0.5) (0.6)

0.9

1.0

(0.6)

(0.5)

(0.6) (0.7)

(0.8)

(1.5) (1.7) (2.0)

BUS QUARTERLY OPERATING PROFIT (S$m) 2.0

P/B (x) 0.8

(0.4)

(1.0)

1.1

1.2

0.9

-

1.3

(2.0)

20

23.9

28.2

32.6

36.9

41.2

45.6

30

18.5

22.8

27.2

31.5

35.8

40.2

(4.0)

40

13.1

17.4

21.8

26.1

30.4

34.8

(6.0)

50

7.7

12.0

16.4

20.7

25.0

29.4

(8.0)

60

2.3

6.6

11.0

15.3

19.6

24.0

(10.0)

70

-3.1

1.2

5.6

9.9

14.2

18.6

Source: UOB Kay Hian

• We estimate the rail financing framework could lead to a special dividend payout of 16.4-20.7 cents/share, assuming: a) the government buys back rail assets from SMRT at 1-1.1x P/B, b) SMRT pays down 50% of its outstanding debt, and c) the remaining net cash gets fully paid out as a special dividend. However, there could be possible downside risk should SMRT undertake extra debt in the near term. • A defining quarter for SMRT’s bus operations. After 17 consecutive quarters of losses, SMRT recorded an operating profit of S$0.9m in 4QFY15. We expect SMRT’s bus operations to improve further due to improving bus ridership, higher fares and lower diesel costs. We estimate bus revenue to grow 11.3% yoy to S$265m in FY16. EARNINGS REVISION/RISK • Reduce FY16 and FY17 earnings estimates by 13% and 4% respectively mainly due to higher repair and maintenance costs and the weaker rail performance. VALUATION/RECOMMENDATION • Maintain HOLD with a DCF-based target price of $1.68, implying 24.4x FY16F PE and dividend yield of 2.4% (WACC: 7.9%, terminal growth: 3.0%). We expect SMRT to re-rate should there be any further details offering clarity on the railway restructuring. However, the restructuring is unlikely to take place in FY16. We continue to prefer ComfortDelGro for its overseas growth potential, diversification and cheaper valuations. SHARE PRICE CATALYST

1Q FY2014

2Q FY2014

3Q FY2014

4Q FY2014

1Q FY2015

2Q FY2015 (1.4)

3Q FY2015

4Q FY2015

(0.5)

(4.4) (5.5)

(7.8)

(7.4) (8.7)

Source: SMRT, UOB Kay Hian

PE (x ) 40 36 32 28 24 20

+1SD Mean -1SD

16 12 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Datastream, UOB Kay Hian

P/B (x ) 5.0 4.5

+2SD

4.0

+1SD

3.5 3.0 2.5

Mean -1SD -2SD

2.0 1.5 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Datastream, UOB Kay Hian

• Shareholders’ accretion from new financing framework for the rail segment. • Stronger-than-expected bus and rail ridership growth.

Refer to last page for important disclosures.

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PROFIT & LOSS Year to 31 Mar (S$m) Net turnover

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BALANCE SHEET 2015

2016F

2017F

2018F

Year to 31 Mar (S$m)

2016F

2017F

2018F

2,042.5

2,285.9

2,484.2

2,573.4

90.0

90.0

90.0

90.0

1,235.5

1,314.4

1,396.1

1,480.1

EBITDA

324.0

376.5

430.7

486.3

Other LT assets

Deprec. & amort.

203.2

231.6

251.7

260.7

Cash/ST investment

156.1

82.5

51.6

49.8

EBIT

120.8

144.9

179.0

225.5

Other current assets

248.6

264.5

280.9

297.8

1.0

2.0

2.1

2.2

2,537.2

2,722.9

2,906.7

3,011.0

Net interest income/(expense)

(10.9)

(14.1)

(15.9)

(15.9)

ST debt

8.9

8.9

8.9

8.9

Pre-tax profit

110.9

132.8

165.1

211.9

Other current liabilities

631.0

653.6

678.2

697.9

Tax

LT debt

812.7

932.7

1,032.7

1,032.7

Other LT liabilities

225.8

216.2

207.2

198.6

859.5

912.1

980.3

1,073.6

(0.6)

(0.6)

(0.6)

(0.6)

2,537.2

2,722.9

2,906.7

3,011.0

2015

2016F

2017F

2018F

Associate contributions

Fixed assets

2015

Total assets

(20.4)

(23.4)

(29.1)

(37.3)

Minorities

0.5

0.5

0.5

0.5

Net profit

91.0

110.0

136.6

175.1

Shareholders' equity

Net profit (adj.)

91.0

110.0

136.6

175.1

Minority interest Total liabilities & equity

CASH FLOW Year to 31 Mar (S$m)

KEY METRICS 2015

2016F

2017F

2018F

Year to 31 Mar (%)

Operating

277.4

337.3

386.1

428.7

Profitability

Pre-tax profit

110.9

132.8

165.1

211.9

EBITDA margin

26.2

28.6

30.8

32.9

(9.0)

(23.4)

(29.1)

(37.3)

Pre-tax margin

9.0

10.1

11.8

14.3

203.2

231.6

251.7

260.7

Net margin

7.4

8.4

9.8

11.8

(1.0)

0.0

0.0

0.0

ROA

3.9

4.2

4.9

5.9

(10.0)

6.8

8.1

2.8

ROE

11.0

12.4

14.4

17.1

Tax Deprec. & amort. Associates Working capital changes Non-cash items

(16.6)

(10.5)

(9.8)

(9.4)

Investing

(455.8)

(474.0)

(449.3)

(349.2)

Growth

Capex (growth)

(462.5)

(475.0)

(450.0)

(350.0)

Turnover

6.2

6.4

6.2

6.0

Investments

3.5

0.0

0.0

0.0

EBITDA

22.1

16.2

14.4

12.9

Proceeds from sale of assets

1.6

0.0

0.0

0.0

Pre-tax profit

48.5

19.8

24.4

28.3

Others

1.6

1.0

0.7

0.8

Net profit

47.0

20.8

24.3

28.2

Financing

178.2

63.1

32.2

(81.4)

Net profit (adj.)

47.0

20.8

24.3

28.2

Dividend payments

(41.1)

(56.9)

(67.8)

(81.4)

EPS

46.7

20.8

24.3

28.2

0.0

0.0

0.0

0.0

Proceeds from borrowings

100.1

120.0

100.0

0.0

Leverage

Others/interest paid

119.2

0.0

0.0

0.0

Debt to total capital

48.9

50.8

51.5

49.3

(0.2)

(73.6)

(30.9)

(1.8)

Debt to equity

95.6

103.2

106.3

97.0

Beginning cash & cash equivalent Changes due to forex impact

155.5 0.8

156.1 0.0

82.5 0.0

51.6 0.0

Net debt/(cash) to equity Interest cover (x)

77.4 29.6

94.2 26.8

101.0 27.0

92.4 30.7

Ending cash & cash equivalent

156.1

82.5

51.6

49.8

Issue of shares

Net cash inflow (outflow)

Refer to last page for important disclosures.

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Disclosures/Disclaimers This report is prepared and/or distributed by UOB Kay Hian Pte Ltd (“UOBKH”), which is a holder of a capital markets services licence and an exempt financial adviser in Singapore. This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. Advice should be sought from a financial adviser regarding the suitability of the investment product, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product. This report is confidential. This report may not be published, circulated, reproduced or distributed in whole or in part by any recipient of this report to any other person without the prior written consent of UOBKH. This report is not intended for distribution, publication to or use by any person in any jurisdiction outside Singapore or any other jurisdiction as UOBKH may determine in its absolute discretion, where the distribution, publication or use of this report would be contrary to applicable law or would subject UOBKH and its connected persons (as defined in the Financial Advisers Act, Chapter 110 of Singapore) to any registration, licensing or other requirements within such jurisdiction. The information or views in the report (“Information”) has been obtained or derived from sources believed by UOBKH to be reliable. However, UOBKH makes no representation as to the accuracy or completeness of such sources or the Information and UOBKH accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Information. UOBKH and its connected persons may have issued other reports expressing views different from the Information and all views expressed in all reports of UOBKH and its connected persons are subject to change without notice. UOBKH reserves the right to act upon or use the Information at any time, including before its publication herein. Except as otherwise indicated below, (1) UOBKH, its connected persons and its officers, employees and representatives may, to the extent permitted by law, transact with, perform or provide broking, underwriting, corporate finance-related or other services for or solicit business from, the subject corporation(s) referred to in this report; (2) UOBKH, its connected persons and its officers, employees and representatives may also, to the extent permitted by law, transact with, perform or provide broking or other services for or solicit business from, other persons in respect of dealings in the securities referred to in this report or other investments related thereto; (3) the officers, employees and representatives of UOBKH may also serve on the board of directors or in trustee positions with the subject corporation(s) referred to in this report. (All of the foregoing is hereafter referred to as the “Subject Business”); and (4) UOBKH may otherwise have an interest (including a proprietary interest) in the subject corporation(s) referred to in this report. As of the date of this report, no analyst responsible for any of the content in this report has any proprietary position or material interest in the securities of the corporation(s) which are referred to in the content they respectively author or are otherwise responsible for. Each research analyst of UOBKH who produced this report hereby certifies that (1) the views expressed in this report in any event accurately reflect his/her personal views about all of the subject corporation(s) and securities in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of UOBKH or any other person, any of the Subject Business involving any of the subject corporation(s) or securities referred to in this report; and (4) he/she has not received and will not receive any compensation that is directly or indirectly related or linked to the recommendations or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transaction in respect of the securities in this report. However, the compensation received by each such research analyst is based upon various factors, including UOBKH’s total revenues, a portion of which are generated from UOBKH’s business of dealing in securities. IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSES Where the report is distributed in Singapore and contains research analyses or reports from a foreign research house, please note: (i) recipients of the analyses or reports are to contact UOBKH (and not the relevant foreign research house) in Singapore in respect of any matters arising from, or in connection with, the analysis or report; and (ii) to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, UOBKH accepts legal responsibility for the contents of the analyses or reports IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by UOBKH, a company authorized, as noted above, to engage in securities activities in Singapore. UOBKH is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution by UOBKH (whether directly or through its US registered broker dealer affiliate named below) to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). All US persons that

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receive this document by way of distribution from or which they regard as being from UOBKH by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through UOB Kay Hian (U.S.) Inc (“UOBKHUS”), a registered brokerdealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through UOBKH. UOBKHUS accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to and intended to be received by a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of UOBKHUS and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Analyst Certification/Regulation AC As noted above, each research analyst of UOBKH who produced this report hereby certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject corporation(s) and securities in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of UOBKH or any other person, any of the Subject Business involving any of the subject corporation(s) or securities referred to in this report; and (4) he/she has not received and will not receive any compensation that is directly or indirectly related or linked to the recommendations or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transaction in respect of the securities in this report. However, the compensation received by each such research analyst is based upon various factors, including UOBKH’s total revenues, a portion of which are generated from UOBKH’s business of dealing in securities.

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