How Downtown line's phased launch could harm SMRT's income

17% of SMRT’s fare revenue base under threat.

According to Maybank Kim Eng, the phased opening of Downtown Line over the next few years presents significant threat of cannibalization to SMRT’s existing network.

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In particular, we estimate the launch of DTL Stage 2 (2016) would put SGD139m or 17% of SMRT’s fare revenue base under threat. When compared against the depressed profit base of SMRT, this potential income loss will be material (SMRT FY3/13: Group EBIT of SGD127m).

We applaud the operational improvements made at SMRT over the past year [NSEWL train withdrawals per 100,000km: 3.50 (Sep 2012) to 2.33 (Sep 2013)].

However, we continue to question its appeal as an investment and maintain our negative view due to negatives from: 1) cannibalization effects of the DTL, 2) uncertain transition terms for its existing rail network, and 3) elevated gearing driven by higher capital spending after prior years of under investment.

With the cannibalization effect not account for, we see spectre for earnings disappointment head. 

Major beneficiary of significant fare hike. With 74% of its revenue from Singapore’s fare-based business, SMRT is a major beneficiary of our expectation of a significant fare hike over the next three years.

We raise our FY3/15E and FY3/16E earnings estimates by 13% and 41% respectively, mainly to factor in revised fare adjustments.