SMRT – CIMB
• Above expectations. 3QFY08 net profit of S$38.3m (-5.3% yoy) was 20% above our estimate and 8% above consensus on an annualised basis. This was attributable to lower-than-expected expenses. Revenue increase of 7.3% yoy to S$202.1m was within our expectations, driven by higher train and bus ridership, improved hire-out rates for taxis, and better advertising and rental revenue. Core EPS was S$0.025, down 5.3% yoy.
• Expenses well-managed. SMRT’s operating expenses climbed 3.5% yoy to S$153.6m on higher staff-related costs (+6.2% yoy) and energy costs (+10.3%), repair & maintenance (+7.6%) and other expenses (+8.7%) However, there was lower depreciation (-10.1% yoy). Volatile diesel costs remained the bugbear and this is expected to remain unchanged into FY09.
• Operational review. Train and bus operations performed well on higher ridership. The main growth continued to come from rentals and advertising on the back of a robust economy and increased rental space at refurbished MRT stations. Net lettable space rose 5.1% with over 99% occupancy.
• Land transport review. The government’s new strategy for Singapore’s rail system has been revealed but details are scant, especially relating to the introduction of competition. What’s certain is that all new rail licences will be valid for 10-15 years instead of 30 years. The introduction of a through-fare system could marginally shave operators’ revenues although the impact should be neutral in the long term.
• DCF target price unchanged at S$1.82. (9.3% WACC; 2% terminal growth). We are raising our earnings forecasts by 30-43% for FY08-10 as we earlier underestimated ridership and group margins despite rising expenses. However, this has been offset by a higher WACC assumption of 9.3% (vs. 7.5% previously) to reflect a higher cost of equity in a more risk-averse environment. At S$1.82, we believe upside would be limited, given the lack of share-price catalysts in the near term. Maintain Underperform.