SMRT – JPM

Circle Line operating performance may see upside

• Circle Line ridership could surprise on the upside: The Circle Line (CCL) attracted a daily ridership of about 30,000 – 35,000 during its first week of operations since the 5-station, phase 3 of the 29-station lines opened in May 2009. This is better than our estimate of 25,000. The remaining phases will be opened from 2010. With the CCL being a “transfer line” cutting across the other lines, it should be able to capture a good amount of ridership share.

• Might be net beneficiary of centralized bus planning: SMRT’s bus network currently spans the less densely populated areas of Singapore. The LTA is in the process of re-planning the whole bus network under its centralized bus planning exercise. SMRT could emerge a net beneficiary from this exercise, as routes get redistributed so that it could have a chance of securing the more lucrative bus services.

• Retail space rental earnings could see slower growth: Retail space rental experienced phenomenal growth in the past on the back of aggressive refurbishment of existing stations and the conversion of bigger underground stations into “Xchanges” housing more retail shops. Going forward, we believe that the growth from this segment could plateau as the CCL is fully underground and the stations are smaller, translating to less lettable retail space. This segment currently contributes about 23% of SMRT’s operating profits and is the second largest profit contributor after the core MRT business.

• Valuation, risks: At 15.4x FY10E P/E, we believe the stock is fairly valued, trading above its historical mean forward P/E of 13.5x. Upside risks could come from the CCL breaking even faster than the FY 2013E in our assumption.

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