SMRT – JPM

SMRT, jpm remains NEUTRAL with target price $1.85

– H08 earnings above JPM estimates. The company reported its 1H08 EPS of S$0.051, versus our estimates of S$0.049. The result was above with consensus of S$0.048 by 6.3%.

– Strong ridership numbers boosted revenue. 2Q08 revenue rose by 5.2% Y/Y to S$197.3MM due mainly to higher train (+5.7% Y/Y), LRT (+4.4% Y/Y) and bus ridership (+0.7% Y/Y) and an increase in advertising and rental revenue. Better taxi average hired-out fleet (90.3% from 84.0%) helped its taxi division breakeven in the 2Q08.

– Electricity hedged for six months. SMRT has managed to renew its electricity contract from 1Oct07 – 31Mar08 for six months at rates that was 9% lower than previous contract. However, diesel cost has more than offset the lower electricity rates as crude oil price has risen by >30% Y/Y compared to our base case for oil at US$65/bbl. If diesel cost continues to remain volatile, this could be a key risk to our earnings going forward.

– Maintain our Neutral call. We believe that SMRT could be negatively impacted by higher diesel costs which are unhedged. Valuations continue to look demanding hence our Neutral rating on the stock and our Jun-08 price target S$1.85 based on our DCF valuation. The stock is trading at 18.8x/17.6x FY08E/09E earnings and a net yield of 4.4%. Key risks include (1) Higher oil and electricity tariff charges and (2) M&A activity in the transportation sector.

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