Get on board for dividends

Story: Full year earnings came in slightly ahead of our expectations, up 11% yoy to S$150m as revenue grew by 8% yoy to S$800m, driven primarily by ridership growth on its MRT trains. EBIT grew 23% yoy, led by the MRT segment (+25% yoy), rental and ads (+22% yoy) and a turnaround from a loss of S$5.1m for the taxi segment to a profit of $0.6m. A final net DPS of 6 Scts was declared, bringing total DPS for FY08 to 7.75 Scts, above our 7.5 Scts forecast.

Point: SMRT continues to impress with effective cost management and with strong ridership growth, the Group’s profitability has scaled well, with EBIT margin expanding from 15% five years ago to over 22% currently. Looking ahead, we expect earnings growth to slow down as it comes from a higher base and as the group faces higher cost pressures, as well as likely start-up costs for the new circle line (Stage 3 is targeted to open in mid 2009). Nonetheless, we expect ridership growth and increasing rental income to continue to underpin steady earnings growth.

Relevance: With a formal policy of aiming to maintain or improve the absolute amount of dividends each year, and given SMRT’s generous track record (c. 80% the last 3 years), we are optimistic that shareholders can look forward to growing dividends as the Group continues to grow. We raise our DPS forecast to 8.5 Scts and 9 Scts for FY09 and FY10 respectively. As such, we raise our TP to S$2 (target 4.5% net yield for FY10) and upgrade the stock to a BUY.

Furthermore, SMRT has highlighted the possibility of giving a special dividend, which we believe has a high likelihood as we project the Group to move into a net cash position this year. We estimate that SMRT can pay another 10-15 Scts in special dividends with internal funds, without crossing the 0.5x Net Debt-to-Equity mark.

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