SMRT – CIMB

Supported by non-fare businesses

Within expectations. 2QFY09 net profit of S$42.6m (+7.7% yoy) was within annualised market consensus (S$157m) and our estimate (S$167m). 1HFY09 net profit of S$82.9m constitutes 49.6% of our full-year estimate. 2Q revenue growth of 15.1% yoy to S$227m was ahead of our forecast, mainly driven by higher train and bus ridership, and rental income. Interim dividend declared was S$0.0175.

Operating expenses. Operating expenses rose 16.9% yoy to S$186m on higher energy costs (+31.1% yoy) and other expenses (+38.6% yoy). Within energy, diesel costs rose 54.1% yoy to S$15.2m, while electricity costs rose 12.9% yoy to S$14.1m. Notably, diesel costs were lower than in 1QFY09 on falling global fuel prices. Staff costs rose 13.5% yoy on higher headcount, salary adjustments and higher CPF contributions. Depreciation was relatively unchanged.

Operational review. Revenue from train and bus operations increased on strong ridership growth. Operating profit margins improved for all segments, although bus operations were hit by higher diesel costs while taxi operations bore the brunt of diesel subsidies, and higher repair and maintenance costs. Operating losses for bus and taxi operations were S$1m and S$0.5m respectively. LRT operations posted a maiden operating profit of S$0.1m and improved contributions from the Middle East in the Palm Jumeriah operations boosted engineering service revenue. Rental growth was boosted by increased net lettable space (+11.7% yoy) to 26,592 sq m with an average 99.4% occupancy.

Outlook. We expect revenue to improve further with increased service frequencies to support higher train and bus ridership as more people switch to public transport, while also supported by non-fare segments in rentals and engineering services. We are also mindful of energy costs, although there has been a welcome reprieve with declining global energy prices.

Upgrade to Outperform from Neutral. We reduce our FY09-11 forecasts by an average 1.6% to account for higher revenue but also higher expenses, resulting in a new DCF-derived (WACC 8.5%) target price of S$2.08 (previously S$2.09). The recent market sell-off has made SMRT attractive again, supported by a dividend yield of 5.7%.

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