SMRT – Kim Eng

The Leash is Tightening

Results in line with expectations
9M08 operating and net profit increased by 13.2% and 16.2% respectively, accounting for approximately 80% and 82% of our full-year forecasts. Year-todate, the key growth drivers are the MRT, Taxi and Rental segments, while bus operations posted weaker profits.

Rising MRT ridership offsetting higher electricity cost
Electricity cost, the most volatile cost component, increased by $8.4m or 30.2% in 9M08. But this was offset by MRT ridership growth of 6.9% in the same period. As MRT ridership increased over the last 2 years, the operating margin of the MRT segment improved markedly from 25.5% in 9M06 to 29.4% in 9M07 and 30.4% presently.

Forecasting low double-digit growth from FY08-10
On account of the increase in the population, firm economic growth and rising tourist arrivals, we expect SMRT to achieve low double-digit operating profit growth from FY08-10. The MRT, Taxi, Rental and Advertising businesses would be spearheading this growth. Meanwhile, there could be upside surprises from the engineering business’s overseas operating and maintenance contracts.

Margins could decline as rail network expands
Following the transport minister’s announcement of the advancement of the Circle Line’s opening from 2010 to mid-2009, we have tweaked our FY10 forecasts. We have raised our MRT ridership numbers but have lowered our operating margin assumption, to take into account the dilution of passenger load over an expanded rail network. With the rail network to be progressively expanded till 2020, we think that it is only a matter of time before the operating margin declines as trains become less crowded.

Risks has increased for land transport operators
From the recent announcements pertaining to the Land Transport Review, we think that the domestic land transport business has become riskier for the incumbents, as the authorities demand higher service standards and exert greater control over their operations. We think a valuation of 15x FY09 earnings for SMRT fairly reflects this risk. As the stock is supported by a forecasted dividend yield of 5.0% in FY09, we are maintaining our HOLD recommendation.

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