SMRT – DMG

Trading at peak valuations; SELL

4QFY10 results below expectations. SMRT registered 4QFY10 net profit of S$22.7m, down 41.4% YoY (-42.2% QoQ), representing only 12.4% of our FY10 estimates. For FY10, net income growth was flat at S$163m. Earnings came in sharply below ours and streets’ expectations due to higher-than expected staff and maintenance costs. Management cautioned that staff costs are expected to be higher in FY11 as additional headcount of between 100-150 personnel is needed for CCL Stages 4-5. We reduce our FY11 net income by 9% to S$165m in view of higher operating costs. We maintain our TP at S$2.00 but downgrade our rating to SELL (from BUY) and sector to NEUTRAL (from OVERWEIGHT) on recent price rise. SMRT declared a final dividend of 6.75¢.

Rail ridership grew 9.7% in 1Q10 (SMRT’s 4QFY10). Between Jan-Mar 2010, SMRT’s daily rail ridership rose 9.7% YoY to 1.51m. We remain optimistic that ridership figures will remain positive this year on the back of strong economic and tourism growth. Stages 1-3 of the Circle Line was fully operational in April but has come short of the government’s daily ridership projections of 200,000 commuters. With the opening of the two integrated resorts, we expect rail ridership growth to register between 7-10% in 2010.

CCL is slated to be fully operational only in FY12 (2H2011). The functioning of Stages 1-3 will not be sufficient for SMRT to breakeven until the entire CCL becomes fully operational. Our channel checks have indicated that CCL Stages 4-5 will only be completed in 2H11 (SMRT’s FY12). A fully operational CCL could raise daily ridership to 500,000, thereby providing positive accretion to SMRT’s bottom line only from FY12 onwards. We believe SMRT will continue to come under significant cost pressures in FY11, offsetting any strong rail ridership expectations.

Trading at upper-end of its 14-22x P/E band; switch to ComfortDelGro. SMRT trades at an unappealing 21x FY11 P/E multiple, nearing its peak P/E multiple of 22x. We view risk-returns on the counter as unfavourable and recommend a pair trade with ComfortDelGro, which trades at an attractive 13x FY11 P/E. SELL SMRT (TP: S$2.00) and BUY ComfortDelGro (TP: S$1.78).

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