SMRT – JP Morgan
2Q FY10 results: strong rental and non-operating income cushioned CCL losses
• Net profit surprised on the upside, helped by better rental and nonoperating income: 2Q FY10 net profit of S$52.8MM (+24.1% Y/Y) was significantly above expectations, bringing 1H10 net profit to S$101MM. This strong set of results was helped by robust rental and non-operating income from maintenance and related contracts.
• Train ridership growth slowed, CCL losses prevail: Ridership was up by a mere 2.2% for the quarter even after incorporating CCL Stage 3 contribution. Operating profit of the train segment was 7% higher, attributed to the non-operating income contribution of S$8.5MM. Stripping that out, operating profit of the train segment actually declined 16% Y/Y. This translates into an estimated loss of S$6MM for the CCL this quarter, in line with our loss estimate. Stages 1 & 2 will open in 1H CY10 and Stages 4 & 5 in 2011.
• Rental business prospects exciting: Operating profit from the rental business increased 10.8% on the back of increased rental space and better yield. The company will refurbish three more Xchanges in FY11 and FY12 – Jurong East (+2,500sqm), Orchard (+1,600sqm) and Esplanade (+2,000sqm), potentially increasing the lettable space by another 20% in the next two years. Rental now accounts for 21% of total operating profit and looks set to increase going forward.
• First foray overseas set to go: SMRT completed its 49% acquisition of Shenzhen Zona. The associate will start contributing in 3Q10. Management expects Zona’s profit after tax in 2010 and 2011 to at least more than double the Rmb24MM in 2008, based on existing fleet size alone, due to lower interest expense. Management expects Zona’s profit contribution to be material in five years’ time.
• Maintain Neutral, raise Dec-10 PT to S$1.90: We raise our earnings estimates by 23%/24%/27% for FY10/FY11/FY12 to incorporate the potential rental contribution from the three new refurbished Xchanges, fare reversion post-June 2010 when the current fare reduction expires, as well as associate earnings contribution from Zona. As a ersult, we increae our Dec-10 PT to S$1.90.