SMRT – KE

Picking Up Speed

Higher ridership propelling growth
SMRT delivered a strong set of operating results: revenue and operating profit grew 7.8% and 27.6% yoy respectively. Net profit increased 38.8% yoy, bolstered by lower finance costs and higher interest and investment earnings. All business segments posted higher operating profits led by the MRT segment. The MRT, LRT and Bus segments experienced higher ridership. Growth was, however, greatest in the MRT segment, with ridership up 6.9% yoy. We are thus raising our full-year growth forecast for MRT ridership from 3% to 6.9% and our FY08F net profit estimate from $134.6m to $141.7m.

Strong economy bodes well for ridership, rental and advertising
SMRT attributed the increase in ridership to Singapore’s strong economic growth. Assuming Singapore’s economy will sustain its growth momentum, we expect the growth momentum of ridership to continue into FY10. Rental and advertising segments are also benefiting from the strong economy and would provide additional growth to SMRT. We forecast operating profit (a better representation of core earnings) – led by the MRT segment – to grow at an annual average rate of 14% from FY08–10. We maintain our view that SMRT presents a steady if unexciting long-term growth story as Singapore’s population grows progressively to 6.5m, as well as the introduction of new MRT lines.

Improvements in lagging segments
The Taxi segment improved significantly as operating loss narrowed to $0.3m in 1QFY08 from $3.2m in 1QFY07. Higher ridership also reduced losses in the LRT segment. While we foresee the LRT segment to turn around this year on higher ridership, we remain cautious about the growth of the Taxi segment’s ridership given Singapore’s competitive taxi industry. Though the performance of the Taxi and LRT segments have improved, we do not expect them to contribute meaningfully to overall operating profit.

Share price has been trending down
SMRT’s share price has been trending downwards from $1.92 on 16 July to $1.76 on 27 July. We think that this could be because investors were being more cautious in a generally volatile market and were consequently more skeptical about the “transport sector restructuring” story. We arrived at our target price of $1.48 from blending these two valuation approaches: 1) implied FY08 yield of 5.5%; and 2) 17x FY08 PER. Reiterate SELL.

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