SMRT – DBS

Cost concerns linger

Within expectations. 1QFY09 net profit of S$40.3m (+6.2% yoy) was within annualised market consensus and our forecast of S$160m, contributing 25% of our full-year estimate. Revenue growth of 11.2% yoy to S$215.9m was slightly ahead of our expectations, mainly driven by higher train ridership and rental income.

Higher operating expenses. Operating expenses rose 15.7% yoy to S$135m on higher energy costs (+36.2% yoy) and other expenses (+21.1% yoy). Within energy, diesel costs rose 72.3% yoy to S$15.9m, while electricity costs rose 9.5% yoy to S$13.7m. Despite a bigger headcount in preparation for the opening of the Circle Line Stage 3 in mid-2009, staff costs were relatively contained (+7.8% yoy) while depreciation expenses dipped 0.7% yoy. Management expressed concern about sustained high energy costs, especially diesel, and may take the opportunity to hedge should prices fall in the near and medium term.

Operational review. Revenue from train and bus operations increased on higher ridership, as high petrol prices and ERP charges forced more private car owners into taking public transport. Operating profit margins improved for all except bus operations, which were hit by higher diesel costs. As a result, bus operations lost S$3.3m at the operating level, vs. a S$0.5m profit a year ago. Growth drivers were mainly trains and rentals. Net lettable space rose 13.8% yoy to 26,264 sq m with an average 99.1% occupancy.

Outlook. We expect SMRT’s topline to improve further on higher train and bus ridership with increased frequencies as marginal private car owners switch to more affordable public transport. However, energy costs should remain a challenge, despite the prospect of a fare hike in 4QCY08.

Maintain Underperform. We have adjusted our FY09-10 earnings forecasts by – 1.5% to 1.1% to reflect improved ridership as well as higher energy costs, the cost of increased frequencies for trains and higher capex assumptions, which we had earlier underestimated. As a result, our DCF target price drops from S$1.93 to S$1.81 (unchanged WACC 9.3%; terminal growth 2%). Maintain Underperform.

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