SMRT – Phillip

Hold (Downgrade)

MRT Riderships grew 5% y-y and 17% m-m

Circle line stage 2&3 will add to riderships and rental income

Advertising segment rebounding strongly

Upgrading our fair value to S$2.42 on the back of stronger ridership growth

Limited upside of 8% to our fair value, downgrading to Hold from Buy

Changes to the Fare structure

Public Transport Council (PTC) announced the full fare reduction of 2.5% from July’10 and the complete removal of transport penalty. We will finally move towards a distance based public transport where we pay for the actual distance traveled irregardless of the number of mode of transport. According to PTC, 61% of adult commuters will save $23 yearly and 35% of commuters will see an increase of $16.

Updated rideship figures

MRT riderships continue to grow strongly registering a 5% growth for the period (Mar’09-Mar’10) from the same period a year earlier. This was within our estimates of 5% growth and on month month basis ridership grew 17% in March’10. Going forward, the opening of more stations, improved connectivity and affordable fares we think will continue to fuel riderships growth. We are forecasting a 10% increase in riderships for FY2010 while LTA expects circle line to add an additional 200,000 to riderships daily from circle line stage1, 2, 3.

Expect record year of earnings for FY10 ending March’10

We feel that SMRT will be able to achieve another record year of earnings again with net profits coming in at S$187m on the back of S$933m in revenues, representing a year on year growth of 15.3%. The advertising segment will probably show a strong rebound in 4Q10 benefiting from the strong GDP growth of 13.1% y-y by the Singapore economy and upcoming mega events like Youth Olympics. We forecast SMRT to maintain their dividends of 7.75 cents for FY2010 representing a yield of 3.5%. SMRT will be releasing their FY10 results on 30th April 2010.

Valuation and Recommendation

Since our Buy recommendation on 28th January 2010 (S$1.89), SMRT has rose 18.5% and exceeded our target price of S$2.19, and with ridership figures showing strong growth and advertising segment rebounding strongly, we are upgrading our target price to S$2.42. However the current price has limited upside to our fair value and we are downgrading our recommendation to HOLD based on our stock selection system. Our DCF model is based on a risk free rate of 2.78% and 1% terminal growth.

We are downgrading our Buy rating to HOLD but upgrading our fair value estimate to S$2.42 from S$2.19 representing a potential upside of 8% from the closing price.

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