Many analysts have a 'sell' call on SMRT (see: Target Prices) but Deutsche Bank has a 'buy' and a high 12-month target price of $2.32.

Below is the Deutsche report published today (30 Oct 2015) by analysts Joe Liew, CFA and Joshua Lee, CFA:

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We price in rail reforms into our estimates as its probability gets higher
2QMar16 NP of S$45.9m increased 2% YoY and 28% QoQ. If we exclude the S$5.4m breakdown fine, 1H core NP was 47% of DBe and 58% of consensus estimates. Advertising as well as better MRT/bus ridership were reasons for the QoQ increase.

Without the fine, rail EBIT could also have broken even this quarter. While we think that reforms could be announced in FYMar16, we factor in the most conservative rail reform scenario (asset light without surcharges and implementation from FYMar19), as we see no reason on why rail reforms should not materialize ultimately. Buy. 


Upside from rail reforms should offset our net profit forecast declines
We reduce our FYMar16/17/18 net profit forecast by 20% / 34% / 24% to reflect a, (1) 1.9% fare reduction from Jan16, (2) higher labour expenses due to more trains / maintenance, and (3) higher energy expense in FYMar16 but partially offset by a lower DB Brent forecast from 2016. The FYMar19 asset-light rail reform scenario makes up S$0.49/share of our TP. Bus reforms from 4Q16 and lower fuel prices would support short term earnings.

Questions on rail reforms should change from 'if' to 'when
Our doubts on rail reforms have decreased considerably as: (1) SMRT has consistently indicated that negotiations are making good progress, (2) the new Minister of Transport seems keen to fix breakdowns soon, and (3) it makes sense to push reforms before the Thomson-East Coast Line bid in 2016-17.

Street should price in rail reforms soon as their TP of S$1.38/share lags behind
A rail reform announcement should see a rally, similar to the bus reform announcement in 2014 which saw a c.60% increase in share price. Rail makes up c. 55% of group revenues compared to c. 20% for bus. We value SMRT based on DCF analysis, using 6.9% WACC (2.9% rfr, 4.5% erp, 4% cod) and 1% tgr. Key risk: Rail reforms do not materialize. 


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