Defensive Play

Fair value raised on further opening of Circle Line

• SMRT Corp’s 3QFY10 net profit fall of 5% to S$39.2mil came in better than expected. As 1HFY10 was strong, 9-month net profit rose 13% YoY to S$140.2mil.

• 3QFY10 total revenue rose 6% to S$237.8mil, boosted by a S$4.8mil insurance compensation. Nonfare business, which accounts for 27% of total revenue showed stronger performance than the fare business. Rental income was up 16% YoY to S$17mil as SMRT increased lettable space to 29,000 sqm with an additional five refurbished stations (total 33 at December 2009). Advertising saw an encouraging 4% pick up to S$17mil, and engineering and other services surged 40% YoY helped by a new project management job for a Metro Line in Seoul. Despite a smaller fleet size against a year ago, taxi managed to rise 2% YoY.

• MRT operations in 3QFY10 was marginally better than expected, as average fare per ride fell 3.8% YoY to 88.7 cents Singapore while we were projecting 86.5 cents. We had estimated that the current fare cut implemented for April-2009 to June 2010 would bring average fare down by 4.8% YoY for FY10. However, we have revised this to a 4% YoY fall for full year. This results in a 1% upward revision to MRT revenues across the years.

• Bus operations disappointed on ridership numbers, while there was no upside surprise to average fare which fell 7% YoY to 65 cents. We revise bus ridership across the years down by 1%.

• We are tweaking FY10 net profit lower by 1% to S$178mil, despite the upside surprise in 3QFY10. Main reasons are: (1) Higher energy and fuel costs on back of high oil prices; (2) Higher interest expense with S$50mil increase in debt level to S$300mil. Forecast years are cut by 3% each year.

• Nonetheless, we still project a moderately healthy 9% YoY growth for FY10 net profit, as this is a beneficiary year from sharply lower oil prices (against US$120/barrel peak in SMRT’s 1HFY09).

• After the effects of fare cuts in FY10, prospects look better on topline growth. However, we expect ramp up for Circle Line to drag bottomline. Next phase of Circle Line will see a stretch of 11 stations opening in April 2010, bringing total to 16. Management expects CCL to breakeven only after the entire line is fully operational. Remaining phase is expected to be in FY12. Current ridership on CCL is 30,000/day. At steady state on full operation, CCL is projected to enjoy 200,000 rides/day.

• Our fair value raised by 8% to S$2.19/share. Cash flow is strengthened as management now guides that capex for FY10F will be S$100mil, versus S$150mil previously. In addition, we have increased terminal growth to 1.5% (versus 1.3% previously) with next phase of CCL coming onstream to boost overall lure of the trunk public transport system.

• We maintain our BUY rating with 16% price upside. On FY10 dividend of 7.75 cents (1.75 cents paid in 1H), yield is 4%.

• Last but not least, newly-acquired 49%-associate ZONA in China, made an 8-week contribution. While this is insignificant, management maintains that ZONA will be material in five years time. Nearer-term, ZONA’s earnings is expected to double within two years, from that in 2008.