SMRT – DBS

A head above the rest

Story: SMRT’s 2Q results were within expectations. Net profit grew by 7.7% to S$42.6m on the back on a 15% revenue growth to S$227m, arising from increased ridership and rental revenue and others.

Point: The growth in revenue was offset partially by higher operating expenses. Electricity and diesel costs increased by 31% as a result of higher electricity consumption and higher oil prices in 2Q. The Group entered into a new electricity contact from 1 Oct till 31 Mar 09 and the rates are about 30% higher than the preceding contract. It has also hedged about 50% of its remaining diesel requirements at about US$110/bbl. We have already factored the higher cost of electricity into our forecasts and assumed an average diesel cost at a crude oil price of US$105/bbl for FY09F.

Other operating expenses increased by 38.6% due mainly to higher cost of diesel sold and higher operating fees. Its bus operations continued to make an operating loss of S$0.9m mainly due to higher diesel costs. Taxi operations registered an operating loss of S$0.5m, while LRT operations made its maiden operating profit of S$0.2m.

Acquisition of a 49% stake in Shenzhen Zona is expected to complete in 4Q09. Details of expected financial contributions were not shared and we have not factored this into our forecasts.

An interim dividend of 1.75 cents was declared, similar to 1H08.

Relevance: SMRT share price has outperformed the broader market in current times due to the strong ridership numbers, healthy operating results and fundamentals. In our view, the market has priced all these positive attributes in the share price. We pegged our TP at 14x FY10F PER – mid-point of its historical range – equating to $1.60. While we like the company for its defensiveness, we see limited upside for the share price at this juncture. As such, we downgrade to Hold.