SMRT – CIMB

Riding out the recession

• Within expectations. 3QFY09 net profit of S$42.1m (+7.6% yoy) was within annualised market consensus (S$158m) and our estimate (S$164m). 9M09 net profit of S$124m constitutes 75.6% of our full-year estimate. 3Q revenue growth of 8.4% yoy to S$219m was within expectations, driven by growth in all segments with the exception of taxi operations.

• Operating expenses. Operating expenses rose 9.2% yoy to S$179.5m on higher energy costs (+35.1% yoy) and other expenses (+7.2% yoy). Within energy, diesel costs rose 1.9% yoy to S$11.4m, while electricity costs rose 68.3% yoy to S$18.8m due to higher rates from 1 Oct 08. However, rates should fall 25% from 1 Apr 09 under a recent energy contract signed. Staff costs rose 4.2% yoy on higher headcount, salary adjustments and higher CPF contributions.

• Operational review. Revenue from train and bus operations rose on ridership growth, albeit slower than in previous quarters. Group operating profit margins were steady at 23%, although LRT and bus operations were hit by higher energy costs while taxi operations worsened on lower fleet utilisation. However, contributions from the Middle East (Palm Jumeirah operations) continued to grow rapidly (+150% yoy), boosting engineering service EBIT. Rental growth was buoyed by higher average rental rates (+2.2% qoq), despite unchanged net lettable space of 26,674 sq m with an average 99.1% occupancy rate.

• Exploring lower fares. The corporate tax cut and Jobs Credit scheme will benefit SMRT, while we expect savings from the rebate/waiver of the road tax and diesel tax to be passed back to commuters and taxi hirers. SMRT is in discussions with the Public Transport Council for lower bus and train fares by end-Feb 09.

• Maintain Outperform. We maintain our FY09-11 forecasts as the benefits of recent government budget incentives may not be substantial after SMRT passes on the savings to commuters and taxi hirers. Maintain DCF-derived (WACC 8.5%) target price of S$2.08. SMRT remains attractive for its relative defensiveness in an economic slowdown and dividend yields of over 5%.

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