SMRT – DB

Public transportation ridership set to grow

We raise our earnings by 9.4% and target price to S$2.00
SMRT continues to deliver steady earnings growth and a respectable yield of 5.3%. We expect FY10E earnings growth of 10.4% YoY supported by resilient ridership growth and cost savings from lower oil prices. We have raised our earnings by 9.4% in FY10E to account for our lower oil price assumptions. We raise our TP from S$1.95 to S$2.00 and reiterate our Buy recommendation.

Beneficiary of lower oil price, wage deflation, higher ridership and new rail
SMRT should benefit from: 1) a drop in oil prices, 2) lower staff costs, 3) resilient ridership growth and 4) rental income stability due to long leases. SMRT has also secured a contract to operate the palm monorail in Dubai. This contract is based on a cost plus model and could boost SMRT’s revenue by S$20m pa. Our cost assumptions are conservative and should provide further upside to our earnings.

Increase in rail and bus ridership to offset potential reduction in fares
Public transportation ridership could see stronger growth, underpinned by the reduction in transport fares and an increasing trend of moving towards public transport. We cut our assumptions for fares by 5% in anticipation of the potential fare reduction by the PTC at the end of Feb09. We expect the 5% potential rebate in fares to be more than offset by the increase in ridership for rail and bus.

Target price of S$2.00 implies a PE of 16.8x FY10E; risks
We raise our target price from S$1.95 to S$2.00 on our earnings upgrade and a change in our valuation from ROE/PB to DCF. We have used a COE of 7.5% based on a risk-free rate of 2.6%, ERP of 4.8% and a beta of 1.0 with a TGR of 1%. Downside risks include: a strong rebound in the oil price, decline in ridership, sharp reduction in fares, intense taxi competition and disease outbreak.

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