Tuesday, November 5, 2013

SMRT's "imminent" fare increase, how a 10% revenue increase could equates to 150% profit increase

Its out, the hints are there, the bitter medicine is unavoidable...
Public Transports Providers (aka SMRT & SBS Transit) are stand to stem the fall of its price for the past 3 years. With limited sneak peaks into the recommendations by Fare Review Mechanism Committee (FRMC), a number of "shock cushions" have been announced such as concessions, monthly travel pass and more importantly "A More Responsive Fare Formula Compared to the previous fare adjustment formula, the proposed new formula will have a new Energy Index (EI) component - See more at: http://ride.asiaone.com/news/general/story/public-transport-fare-review-committee-wants-more-concessions-commuters?page=0%2C2#sthash.mVAJZZVF.dpuf"

I did a base scenario of 10% increase using SMRT's Q1 Financial Highlights released on 1 Nov 13:


















I realised a 10% revenue increase could easily leads to 150% increase in operating profit; the following is how I derive:

($m)
Revenue (2QFY14)
Increased Figures
Change in $m
Changes in %
Revenue
S$296.3
S$326.3
+ S$30
+10%
Operating Expenses
S$285.8
S$285.8
same
NA
Operating Profit
S$20.0
S$50
+ S$30
+150%
Basic EPS (cents)
0.9
3.28
NA
+364%

Assume all else remains the same, with 10% revenue increase as a result of say 10%-15% fare increase and / or funding from government; I took S$50m divided by 1,523,410,000 shares (extracted from Q2FY14 result, 1(b)).

With a EPS per Quarter of roughly 3cents, the EPS of Full Year will go back to 12cents of its "glory days", this will makes its current share price of $1.29 looks like a value to buy (PE 10.75).

As for Technical view, a second convergence of 50D MA with the shorter MAs (7d & 20d) marks a congestion area which may imply potential reversal. A rejection of new low on 1 Nov 13, and 5 Nov 13's green parabolic dot may mark the start of a new uptrend. MACD lines have been on a slow uptrend below 0, bars are above 0; but not much to imply since it has been on downtrend for past 2years.
















All in all, the imminent fare increase announcement should provides a up spike, reversal or not, depend on the actual amount of fare increase announced.

My view is, the companies have been "forced reduced to non-profits" over the past years that any increase in revenue will provide a multiplier effect to its EPS and thus may boost the counter share price to adjust accordingly.

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