SMRT – DBS

Smooth operator

Comment on Results
1Q08 results were above expectations, with net earnings up by 39% yoy to S$38m, on top line growth of 7.8% yoy to S$194m. Revenue growth was broad-based, led by 9.1% yoy top line growth in train operations, as well as higher contributions from taxi (+11.4%), Rental (+18.4%) and Advertising (+44%). The better than expected performance came from much improved taxi operations, which saw losses narrow from S$3.2m a year ago to less than S$300k in this quarter.

Outlook
Other than absorbing a GST rate hike of 2 percentage points beginning from 1 July, we believe that the operating environment for SMRT is largely benign. Train rider-ship growth remains firm whilst the Group’s rental and advertising business is also benefiting from buoyant ad spend, underpinned by a firm economy. The taxi business is also showing signs of recovery,which we believe is critical to helping the Group perform better than we expect. Another good showing in Q2 would convince us that the taxi business can be profitable for the Group once again.

Recommendation
Currently trading at over 20x earnings, and offering a net yield of c. 4%, we believe that valuations for SMRT are fair. We maintain our HOLD recommendation and target price of S$1.67, which is based on a target net yield of 4.5% for FY09. Given this strong set of 1Q08 results though, there may be potential for an earnings and target price upgrade if SMRT can continue do execute well