SMRT – CIMB
No near-term catalysts
• Above expectations. 2QFY08 net profit of S$39.5m (up 25.3% yoy) was 11% above our estimate and 6% above consensus on an annualised basis. The difference was lower-than-expected expenses. Revenue increase of 5.2% yoy to S$197.3m was within our expectations, driven by higher train and bus ridership, improved hire-out rates for taxis, and higher advertising and rental revenue. Core EPS was S$0.026, up 23.8% yoy.
• Expenses well-managed. SMRT’s operating expenses climbed marginally by 0.2% yoy to S$153.6m on lower staff-related costs (-3.6% yoy) and depreciation (-2% yoy) but offset by higher energy costs (+25.8% yoy) on the back of higher electricity costs. Diesel costs remained relatively unchanged despite the volatility in prices. However, with a new electricity contract starting 1 Oct 07, electricity costs are expected to be contained. Maintenance expenses rose 8.4% yoy due to a larger bus and taxi fleet. Although staff costs were lower in 2Q, we expect costs to rise in the coming quarters due to a human-resource shortage, and the need to raise wages to retain staff as well as the impact of higher employers’ CPF contributions.
• Operational outlook. Train operations performed well due to higher ridership and the fare revision in Oct 06. The main growth areas continued to be rentals and advertising on the back of a robust economy and increased rental space at refurbished MRT stations. LRT operations also moved closer to breakeven, but were again plagued by higher energy costs. Taxi operations turned around with a small operating profit of S$0.2m from a loss of S$0.9m in the previous year.
• DCF target price unchanged at S$1.82 (7.5% WACC; 2% terminal growth). We are maintaining our forecasts as we estimate that staff and volatile energy costs in 2H will continue to put downward pressure on profits. We believe upside would be limited, given the lack of share-price catalysts in the near term. Maintain Underperform.