Ridership growth remains key positive

SMRT reported 2QFY09 net profit of S$42.6m, up 7.7% YoY, in line with expectations.

MRT is key contributor to operating profit. MRT revenue rose 13.7% YoY to S$122.8m, and accounted for a 54% revenue share. MRT average daily ridership was up 13% YoY to 1.44m rides. Higher electricity costs however, led to a slower 10.5% YoY increase in MRT operating profit, though this still accounted for a sizeable 70.5% share of total operating profit.

Bus operations was lacklustre. Bus average daily ridership grew 5.8% YoY to 809k rides. However, diesel costs rose 54.1% YoY to S$15.2m, and this contributed to bus operations recorded an operating loss of S$0.9m, versus the S$0.8m gain in 2QFY08.

Fare hike will drive revenue going ahead. The Public Transport Council has approved an average 0.6% fare adjustment on SMRT’s bus and train fares effective 1 Oct 08. Overall, SMRT expects to yield an additional S$3m in fare revenue over the next 12 months from 1 Oct 08.

Commercial space rental remains a star performer. Commercial space rental revenue surged 44.7% YoY to S$14.2m. Though this accounts for only 6.3% revenue share, its share of operating profit is a sharply higher 20.3%. Total lettable space has risen 11.7% YoY to 26,592 sqm.

Earnings forecast adjustments. We raised our FY09 net profit forecast by 7.1% to S$154.8m, due to expectations of higher revenue for 2HFY09. Our FY10 net profit forecast is also raised marginally by 2.6%. We are assuming CY09 average WTI price of US$70/barrel, which is lower than CY08’s US$100. However, SMRT’s 6-mth electricity contract till Mar 09 is at a higher rate (30% higher than the previous 6-mth contract), and therefore the benefits of lower electricity cost will only flow through from FY10 onwards. We have also factored in increased costs with the commencement of the Circle Line revenue service in mid-2009.

SMRT declared an interim dividend of 1.75S¢/share. We are forecasting FY09 dividends of 8.7S¢, based on a 85% payout ratio (versus 78% in FY08). This gives a dividend yield of 5.6%. As the recent market collapse has led to yields of many equities rising sharply, this 5.6% now appears less attractive. The market risk premium has risen from 9.46% in early Oct 08 to the current 10.78%. As a consequence, we are cutting our price target to S$1.65, from the previous S$2.03. Maintain NEUTRAL call on SMRT.

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