SMRT – Kim Eng

Q1FY09 results

Still keeping ahead but just barely
Revenue growth of 11% was driven by MRT and rental income. However, a 36% jump in electricity and diesel costs as well as fuel subsidies to taxi hirers eroded EBIT margin from 23% to 22.3%, leading to only 6% growth in net profit. Train profits were higher YoY but LRT, buses and taxis slipped into the red, mainly due to higher energy costs.

Higher train ridership offset by higher staff & energy costs
Train average daily ridership rose 10.9% during the quarter, boosting operating profit by 9% but gains were eroded by higher staff and electricity costs. Staff costs rose 8% due mainly to headcount of 230 engineers added (another 100 to go) for Circle Line Stage 3 which will be revenue-ready by June 2009, as well as salary adjustments and the 1.5%-point hike in employer’s CPF rate in July 2007.

Energy costs still a big headache
The high cost of diesel is still a big headache for SMRT. If diesel price remains high, buses and taxis in particular will operate at a loss. For taxis, SMRT provides direct subsidies to its taxi hirers to the tune of almost $1m in Q1FY09. It currently does not engage in any hedging as prices are still too volatile.

Saved by rental income
Fortunately, aggressive growth in rental income from commercial spaces at MRT stations (+47% in Q1FY09) as a result of better rental yield and more space following asset enhancement exercises helped to recover some of the gains SMRT gave up to energy and staffing costs. Management expects an incremental $10m rental revenue this year as it is still in the process of upgrading seven more station.

Dividend decent but no catalysts, maintain HOLD
Dividend yield is projected at 4.7% this year, decent but nothing to shout about. While management is hopeful that the PTC will allow a fare increase later this year, it is unlikely to fully cover higher operating costs. Given the lack of catalysts, we maintain our HOLD call.

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