SMRT – DBS

Blip due to impairment

At a Glance

• 3Q10 net profit of S$39.2m (-5% yoy) was within expectations, excluding S$6.6m goodwill impairment
• Operations stable with improving rail ridership and rental revenue contribution
• Maintain Buy, TP: S$2.08 for its low beta and defensive attributes

Comment on Results

3Q10 within expectations excluding impairment. 3Q10 net profit was down 5% yoy to S$39.2m largely due to S$6.6m impairment of goodwill on its Singapore bus operations. Revenue rose 2.6% yoy to S$224.7m on higher rail ridership (+5.8% yoy), Circle Line (CCL) contribution, rental and fees from overseas projects. S$6.6m impairment from buses. The impairment on intangibles was taken on buses as SMRT expects long term bus ridership to be affected by a shift towards rail (with an expanded network), increase in transfer rebates and higher operating costs.

Ridership resilient, rental revenue grew 16%. Average daily ridership for trains continued its uptrend, increasing by 5.8% yoy and 1.7% qoq to 1,493k/day. Average ridership for bus, remained relatively flat (+1.7% yoy, -2.5% qoq) to 782.8k/day. Rental revenue increased 16% yoy to $16.9m with EBIT at S$13.3m (+23% yoy), due to better rentals and 9% yoy increase in lettable space to 29,028 sqm. Rental accounted for c.24% of Group’s EBIT.

Recommendation

CCL 1&2 to open from 17 Apr. CCL Stage 1&2 (11 stations) will open from 17 Apr. CCL is expected to breakeven only when it is fully operational with Stages 4&5, sometime in 2011. However, we believe its resilient ridership from the matured rail lines would buffer the start up costs from CCL.

Buy, TP maintained at S$2.08.. SMRT’s overall ridership will benefit from the opening of stages 1&2 of CCL, coupled with potential increase in rental from additional stations. Furthermore, increasing costs of car ownership, population growth, and growing tourists’ arrivals bode well for rail operations. Buy, TP: S$2.08 based on average of 15x FY10F/11F PE and DCF (WACC 7.2%, 1%).

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