SMRT – DMG

Gateway to paradise

1QFY10 results in-line with expectations. 1QFY10 registered net profit of SGD48.2m, up 19.6% YoY (+24.7% QoQ), or 28.7% of our full year forecast of S$168.1m. The variance was due to the lower-than-expected increase in staff costs which rose 3.3% compared to our forecast of 10.4% as well as unexpected income gains from maintenance projects which amounted to S$7.5m. Operating profit rose 19.9% boosted by MRT (+8%), bus (+136%) and retail rental (+13%). We upgrade SMRT to BUY with a revised target price of S$2.00 from NEUTRAL (S$1.65 previously) as we expect the twin opening of the Integrated Resorts as well as the government’s broader initiatives to encourage public transport usage, to materially improve SMRT’s ridership prospects, hence justifying our stronger terminal growth assumption of 2.5% (2.1% previously).

Rolling along with the high rollers. Between Jan-May, SMRT’s daily rail ridership rose a mere 3.6% YoY to 1.39m, dragged by the recessionary environment. We are, however, upbeat that ridership figures could be stronger next year on the back of stronger economic and tourism growth. The Circle Line will be fully operational in 2010, which will be the gateway to the two Integrated Resorts. We forecast rail ridership growth of 4% in FY10 and a stronger 10% in FY11, in anticipation of positive spin offs from these resorts which will radiate tourists and locals alike towards these locations.

Play the defensive game – Upgrade to BUY. The recent market surge has brought the STI to 3% below our 2,750 target, leaving little upside returns. We view SMRT as an ideal switch play for investors with a defensive mandate. SMRT has a low beta of 0.45x and strong earnings resilience underpinned by positive growth prospects. Since March, SMRT’s stock price has risen by a mere 8% vis-à-vis the STI’s 83%. In terms of dividends, we believe management will continue to reward investors with at least 70% payout. Its strong free cash-flows of S$113m in FY10 and S$127m in FY11 will support future dividend payments. SMRT currently trades at 15.8x FY10 P/E multiple which is at the lower range of its 15-20x trading band. At our target price of S$2.00, SMRT will trade at an FY10 P/E multiple of 18x.

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