SMRT – AmFraser
- We initiate coverage of SMRT Corp Ltd (SMRT) with a BUY rating. Fair Value of S$2.11 presents a 19% upside to current price. We have applied a DCF approach to SMRT’s
steady cash flows, with terminal growth at 1% and netting off S$1bil for the 30-year licence extension and transfer of assets for the new Circle Line.
- Amid a slow economy, SMRT’s earnings are defensive with 80% revenue derived from the public transport fare business. We expect ridership growth on trains and buses to be supported, as costs of private vehicle usage continues to increase, while its rail and bus network continues to improve in terms of convenience (connectivity, shorter travel times and shorter headways) and affordability.
- We project 12% growth in mass rapid transport (MRT) ridership for SMRT to 572mil in FY10 and 9% to 623mil in FY11. This will offset average fare cut of 4.6% implemented from 1 April 2009 until end-June 2010.
- With the progressive opening of SMRT’s new Circle Line – first phase having started in May 2009 with 2nd phase in 2010 and 3rd phase in 2011 – we would expect some new
comers to public transport. But the impact will be somewhat muted on incremental ridership as some rides on Circle Line may cannibalise rides from SMRT’s other two
MRT lines. Early estimates put ridership on Circle Line’s first phase at 55,000 per day, rising to 0.5 million at a steady state upon full operations of the entire line.
- Lacklustre taxi operations will be offset by growth in rental and engineering/other services segments. SMRT will continue to redevelop its MRT stations into lettable commercial space, which are in high demand for its location in high pedestrian traffic areas. So far, SMRT has renovated about half of its stations.
- With oil prices off last year’s peak, SMRT stands to benefit as about 20% of its costs are energy-related items. As such we expect an improvement in EBITDA margins from 33% in FY09 to 34% in FY10. But we expect margins to revert to 33% in FY11 with increasing costs from further phases of the fully underground Circle Line.
- Steady cash flows can comfortably support capex of S$150mil per annum for continual upgrading and expansion of transport fleet, station renovations and other system and service improvements. This leaves enough room to maintain DPS at 7.75 cents Singapore per annum. In addition, we estimate a potential for paying out a special dividend of 1.5 cents in FY11 if management wishes to.