SMRT – CS

2Q10 results: another pedestrian quarter

● SMRT delivered September 2009 quarter results that were largely in line with our estimates. Revenue grew 1% YoY, while earnings were up 24% YoY, due to lower fuel costs (-17% YoY), savings from the government’s Jobs Credit initiatives, and boost from other income.

● Management declared an interim dividend of S1.75cts, unchanged from the previous year, and shared further details on the recently completed Shenzhen ZONA acquisition, which is expected to contribute materially to earnings within five years.

● 6MTD revenues and earnings are at 50% and 65% of our full-year estimates, respectively. Going forward, we see costs rising in line with increased staff and maintenance expenses for the CCL Stage 3, and the new six-month electricity contract at 11% higher tariffs. Beyond factoring in contributions from other income (in FY10) and ZONA (from FY11), our forecasts are kept largely intact.

● We continue to see SMRT’s valuation at about 16x P/E as demanding versus its 14x historical average, the Singapore market, and CD, given the latter’s stronger earnings profile and China leverage. Our DCF-based target price is S$1.60 (from S$1.57). We maintain our UNDERPERFORM rating.

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