Positives priced in

Below; downgrade to NEUTRAL. FY3/10 net profit slipped 0.1% yoy to S$162.92m, 9.7% below our and consensus estimates. The underperformance was due to higher-than-expected operating expenses, mainly a result of higher-thanexpected repair and maintenance costs for its bus operations. It also announced a final dividend of 6.75 cents/share. We cut our FY11-12 earnings estimates by 7-8% to account for lower revenue, no thanks to lower average fares from July 2010 onwards and higher operating expenses. We also introduce our FY13 earnings estimates. Due to our earnings cut, our DCF-derived target price is reduced from S$2.41 (WACC 9%, terminal growth 2%) to S$2.35. We downgrade SMRT from Outperform to NEUTRAL as we believe that positives from the opening of Circle Line stages 1 & 2 have been priced in. The stock price has done well in Apr (+11%) and its dividend yields of 3-4% are no longer attractive relative to the S-REITs.

EBIT rose 4.5% yoy. Despite fare reductions, revenue grew 1.8% yoy, thanks to contributions from the new Circle Line, higher rental revenue and higher overseas revenue. Staff costs rose 6.3% yoy while energy costs fell 12.3% yoy due mainly to lower diesel prices. Repair and maintenance costs rose by 19.4% yoy.

Operational review. FY10 train revenue rose 1.4% yoy, thanks to higher average ridership (up 5.2% yoy) and contributions from Circle Line’s stage 3 (the first stage to open), offset by lower average fare for MRT. However, bus revenue fell 3.6% yoy on lower average fare. Taxi revenue was down 1% yoy due to a smaller average holding fleet. Rental revenue grew 13% yoy, driven by improved yields and increased rental space. As at Mar 2010, the total lettable space was 28,909 sq m. In FY11, SMRT will have more rental space coming from nine more stations (including six new ones).

Operating expenses to be higher in 1Q11. SMRT expects 1Q11 revenue to be higher yoy due to the newly-opened Circle Line stages 1 & 2 and higher MRT and bus ridership. However, SMRT also guided for higher opex yoy due to higher energy costs and higher staff costs related to the Circle Line.

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