SMRT – DMG

Investing in Shenzhen transport company

SMRT has entered into an agreement to acquire a 49% equity interest in Shenzhen Zona Transportation, a leading road transport company in Shenzhen. The purchase consideration of Rmb 430m (S$90m) will be paid in cash. The balance 51% continues to be held by National Express Transportation Group.

Zona provides the following:
• Taxi services and car and bus repair within Shenzhen;
• Town and county bus services, car leasing, bus and coach services within and beyond Shenzhen; and
• Public bus and mini bus services outside the Shenzhen Special Economic Zone.

Zona has an existing fleet of 803 buses, 142 chartered & tourist buses, 78 long haul coaches, 830 taxis and 260 leased cars in the Shenzhen region.

Following the acquisition, Zona will be an associate company under SMRT. The investment is earnings accretive. But SMRT expects immaterial financial impact on SMRT’s FY09 results.

As of Dec 07, Zona has a net asset value of Rmb 483m (S$101m), represented by NTA of Rmb 59m and net intangible asset of Rmb 424m. The net intangible assets largely comprise taxi operating licences acquired through open bids.

Separately, SMRT has signed a new 6-mth fixed-rate electricity contract effective 1 Oct 08. The rate for this new contract is 30% higher than that for the previous 6-mth contract, despite the recent softness in crude oil price. We have therefore raised our forecast of FY09 electricity expenses.

On a positive note, we have raised FY09F MRT ridership growth to 10.9% (versus earlier assumption of 9.7%). This follows the 11.6% YoY expansion for Apr-Aug08 to a MRT monthly average ridership of 42.69m. After factoring in higher electricity expenses as well, we are cutting our FY09 net profit forecast by 1.6% to S$144.5m.

SMRT share price has risen 17.9% YTD whilst the STI has fallen 31.9%. Most of the positives are already factored into SMRT share price. Though the investment in Zona is a good start to SMRT expanding overseas, the impact is seen to be marginal in the short term. We see little upside for SMRT share price going ahead. Even the FY09 dividend yield of 4.1% (based on 85% payout ratio) is only slightly higher than the 3-mth SIBOR of 1.85%. The market risk premium is now 9.46%, versus 8.68% two months ago. Consequently, our DCF valuation has been cut from S$2.08 to S$2.03. We are downgrading SMRT from BUY to NEUTRAL.

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