SMRT – DBSV

Train derails at 4Q10

4Q10 net profit (S$22.7m, -41% yoy) way below consensus’ and our expectations

Impacted by higher staff, R&M and depreciation costs; trimmed FY11F forecast by 6%

Market has been overly euphoric over prospects, counter not cheap at c.20x PE

Downgrade to Fully Valued; TP S$2.00

4Q earnings came in way below consensus’ and our expectations. Net profit of S$22.7m was down 41%/42% yoy/qoq. The dismal performance came from higher staff costs (+15% yoy), repair & maintenance (+33% yoy) and depreciation (+10% yoy), while topline grew by only 3.7% to S$225m. As a result, 4Q10 EBIT margin was at 12%, down 5.2ppt, a far cry from the 17.2% registered a year earlier. FY10 net profit ended flat at S$162.9m, against a year ago, 7.7% below our expectations.

Share price beat STI by 15.8% YTD. SMRT’s share price has done well, up 19.4% YTD and outperforming the STI by 15.8%. This was on the back of high market expectations of robust ridership growth and the opening of Circle Line Stage 1 & 2.

Time to disembark; Downgrade to Fully Valued, TP cut to S$2.00. We cut our FY11F forecasts by 6%, on higher staff, and repair and maintenance costs. This will be partially offset by higher train ridership, with the opening of the Circle Line. The recent strength in share price has exceeded our expectations. While the long term prospects for rail in Singapore is positive, we believe the market has been overly euphoric over the opening of the Circle Line Stages 1& 2 in the past couple of weeks. Our TP, based on average of PE (15x) and DCF, is cut to S$2.00 (S$2.08) on lower FY11F earnings.

Switch to cheaper ComfortDelGro. The counter is now trading at 20.4x on our FY11F revised earnings, which seems rather rich. For investors who would still like exposure to land transport counters, we recommend a switch to ComfortDelGro, trading at c.15x prospective PE, a 25% discount from SMRT.

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