SMRT – Phillip

2nd Quarter FY2010 Results

Marginal year-on-year topline with significant bottomline increase. SMRT Corp Ltd announced Group revenue for the second quarter of FY10 (“2QFY10”) of $229.4m. This represents a marginal increase of 1.1% from a year ago due mainly to higher revenue with the operation of Circle Line Stage 3, increased rental revenue and higher revenue from overseas projects, partially offset by fare reduction. Net profit for 2QFY10 came in at $52.8m, an increase of 24.1% compared to the same period last year. The significant increase was on the back of higher revenue and other operating income, Government Budget measure, lower energy costs and lower other operating expenses. The results are mainly within our expectations and we maintain our HOLD call with no changes in our fair value estimate of $1.89 as from the previous last done price of $1.73, this represents an upside of 9.25%.

Train Revenue Segment. Total Ridership for the quarter grew by 2.2%. Revenue increased marginally from $122.8m to $123.3m or 0.4% year on year. This was mainly due to higher average daily ridership and the commencement of the Circle Line Stage 3, partially offset by the fare reduction. EBIT increased from $36.1m to $38.7m or 7.0% due mainly to higher revenue and other operating income. Revenue from LRT operations fell by about 5% to $2.2m with EBIT declining approximately 28% to $0.1m.

Bus operations Revenue Segment. Bus operations posted a 4.6% decline to $51.0m in 2QFY10 due mainly to lower average fare and average daily ridership. Total ridership declined by 0.7% year on year. However, lower diesel costs improved bus operations EBIT, resulting in an operating profit of $1.8m compared to an operating loss of $1.1m a year ago.

Taxi Revenue Segment. Revenue in this segment saw a decline of 2.6% to $17.9m for 2QFY10 due mainly to a smaller average hired-out fleet. As a result of the smaller average holding fleet, operating expenses were lower and thus resulting in an operating profit of $0.8m compared to an operating loss of $0.5m in the same period last year.

Rental Revenue Segment. Rental revenue saw another quarter of good performance growing by 13.1% from $14.2m to $16.1m year on year. This was mainly due to increased rental space, a total of 29,225 sqm lettable space at the end of 2QFY10, and better yield. EBIT grew by 10.8% from $11.5m in 2Q09 to $12.7m this quarter.

Advertising Revenue Segment. The weak economic environment saw advertising revenue decline 9.8% to $5.4m with EBIT declining 10.8% to $3.4m.

Engineering and Other Services Segment. This segment saw an increase in revenue by 38.0% to $13.4m and EBIT grew almost five-fold to $5.5m on the back of increased consultancy revenue and higher fees from overseas projects.

The Group has fixed the rates for their electricity contract for the next 12 months from 1st October 2009 to 30th September 2010. The rates will be 11% higher than the previous six-month contract, which ended on 30th September 2009.

The $150m fixed rate notes issued recently in October 2009 should see Finance costs increasing. Total debt will return to current levels when the existing notes of $100m and $50m are repaid in December 2009 and January 2010 respectively.

The Group should be facing a challenging environment for the remainder of its financial year with the fare reduction package ending only in June 2010 as well as higher operating expenses due to increase in ramp-up costs for the remaining circle line stations, volatile diesel prices, higher electricity tariff rates, expected increase in headcount and therefore staff related costs and higher scheduled repairs and maintenance for Train. The Jobs Credit Scheme will also be at stepped down rates for six months from January to June 2010.

Our fair value estimate remains at $1.89 as most of the expected increase in operating expenses has already been factored in previously. With the last traded price of $1.73 representing a 9.25% upside from our target price, we reiterate a HOLD call based on our stock selection system.

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