SMRT – OCBC

Visit to Circle Line Stages 1 and 2

Circle Line to boost ridership… We had a sneak preview of Circle Line (CCL) Stages 1 and 2 yesterday, almost two weeks ahead of its official opening on 17 April. All 11 stations from CCL Stages 1-2 are fully ready for operations, except for a few minor fittings and installations. When opened, ridership from this stretch of 16 stations (including five existing CCL Stage 3 stations which have been in operation since last May) is expected to jump to 200k commuters, up from almost 40k for the first five stops currently. We understand from management that it is not expecting the network to breakeven immediately with the additional stations. However, we continue to hold our optimism that SMRT is likely to attain another level of growth as it captures higher train ridership from the progressive opening of CCL. The rest of the CCL stations (Stages 4 and 5) are slated to open in 2011. When this happens, the CCL is expected to see ridership of 500k commuters, which would contribute significantly to its top and bottom line, in our view.

…and rental and advertising revenue. Apart from higher ridership, CCL Stages 1 and 2 are expected to give a boost to its rental and advertising revenue. According to management, this is estimated to add approximately 2,500sqm of net lettable rental space (out of which 2,000sqm is from Esplanade Xchange, which is located right at the heart of the bustling city area), or 8.6% of its total lettable space in 3QFY10. The take-up rate has also been encouraging at the mid-80s level, and committed by a variety of retailers and food chains at competitive market rates and average tenancy period of three years. In addition, we see ample room for advertising opportunities in these stations, considering the human flow and available space.

Fair value raised to S$2.22; maintain BUY. We are maintaining our BUY rating on SMRT. We like the group for its defensive nature, consistently strong operating cash flows and dividend payouts. As the group enters a new fiscal year (FYE 31 Mar), we now roll our valuation to FY11 (forecasts kept intact). This raises our DDM-based fair value from S$2.05 to S$2.22, or 19x FY11F EPS (still within 5-year PER range of 11-22x).

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