SMRT: Earnings Miss Expectations on Deployment Slowdown, Price Target Lowered

Investment bank Hong Leong Investment Bank (HLIB) has maintained its “BUY” call on a key technology player, despite the company reporting a first-quarter net profit that fell below expectations, largely due to a slower-than-anticipated pace of site deployment. The research firm, however, revised its target price downwards to RM1.24 from RM2.07.

The group’s core net profit for the first quarter of financial year 2026 (1QFY26) stood at RM7.1 million, marking a 4.6% quarter-on-quarter (QoQ) decline and a marginal 0.1% year-on-year (YoY) decrease. This performance represented only 22% of HLIB’s full-year forecast, primarily attributed to weaker-than-expected growth in site deployment activities. No dividend was declared for the quarter.

Performance Review

Quarter-on-quarter, the company saw sales decline by 4.6%, impacted by weaker performances across both the Malaysian and overseas markets, which saw drops of 6.1% and 14.0% respectively. The softer domestic topline was largely a result of reduced one-off deployment revenue from a key utilities customer. Core profit after tax also mirrored this decline.

On a year-on-year basis, the top line remained relatively flat. While the Malaysian market registered stronger performance with an 8.3% increase, this was offset by a significant 29.1% decline in overseas sales. The weakness abroad stemmed from lower contributions from Indonesia’s PLN, coupled with delayed call-ups for new projects following management changes. Conversely, Malaysian sales benefited from an increased number of managed sites for the key utilities client.

Future Outlook and Challenges

HLIB views the upcoming quarter’s deployment pace as a critical indicator, particularly given management’s aim to clear the bulk of its Tenaga-related backlog by December. The investment bank cautioned that a failure to significantly accelerate deployment during this period could lead to further earnings drag, as Tenaga typically contributes over 50% to the group’s profits.

Looking ahead, earnings trajectory for FY26 will be influenced by several factors, including the success of extending tax incentives, the deployment speed for its key customer Tenaga to support recurring income, and the rollout schedule for PLN Jakarta Phase 2. Additionally, the expiry of the company’s pioneer status in November 2025 will result in higher corporate tax, partially impacting future results. Despite near-term challenges in the utilities segment, management has identified robust opportunities within the Financial Services Industry (FSI) segment, notably from Philippine and Indonesian customers.

Investment Recommendation

In light of the revised operational environment and slower-than-expected deployment, HLIB has adjusted its FY26F/FY27F earnings forecasts downwards by 10%. The target price recalibration to RM1.24 (from RM2.07) is based on a lowered P/E multiple of 20x (previously 30x), aligning it with the sector average.

Despite the target price reduction, HLIB maintains its “BUY” recommendation, citing the company’s strong earnings potential across its utilities and FSI segments, bolstered by a growing recurring income base. The investment bank believes the market has largely priced in the delays in Tenaga site deployment, with the stock currently trading at an undemanding valuation. Any significant improvement in the group’s deployment numbers is expected to trigger a meaningful recovery in the company’s share price.