SMRT – DMG

Lower energy costs boosted margins

2QFY10 results above expectations. 2QFY10 registered net profit of SGD52.8m, up 24.1% YoY (+9.5% QoQ), or 31.4% of our full year forecast. The variance was due to lower staff costs which fell 1.1% compared to our forecast of +10.4% as well as the 16.9% decline in energy cost. Operating profit rose 20.1% YoY boosted by MRT (+7%), bus (+272%) and retail rental (+11%). We raise our FY10 net profit by 9% to S$183m from S$168m while maintaining our TP at S$2.00.

Ridership growth still sluggish; stronger growth expected in FY11. Between Jan-Sep, SMRT’s daily rail ridership rose a mere 3.2% YoY to 1.42m. 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 2011, 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.

Higher operating expenses expected in 2HFY10. Management cautioned that 2HFY10 profitability will be impacted by the 11% increase in electricity tariff which has been contracted for the period between 1 Oct 2009 and 30 Sep 2010. Apart from higher energy costs, management expects operating expenses to rise due mainly to more scheduled repairs and maintenance, and higher staff and related costs as headcount is expected to be higher with the operation of Circle Line Stage 3, increased train runs and recruitment of bus service leaders.

At its lower range of its 14-20x trading band. SMRT currently trades at ~14x FY10 P/E multiple which is at the lower range of its 14-20x trading band. We view SMRT as an ideal switch play for investors with a defensive mandate, given the 7-month market surge. SMRT has a low beta of 0.45x and strong earnings resilience underpinned by a firmer economic outlook. At our TP of S$2.00, SMRT will trade at an FY10 P/E multiple of 16.5x, a reasonable peg in our view. An interim dividend of 1.75¢ per share was declared for 2QFY10.

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