SMRT – Phillip

Disappointing Q to end the year

Revenue for FY10 was 3.6% higher at S$938m, net profit up 0.1% to S$162.8m

Results were disappointing, much lower than consensus estimates

Declared final dividends of 6.75 cents, bringing FY10 total to 8.5 cents

Downgrade our price target to S$2.36 to reflect higher operating costs for 2011

Maintain Hold rating as potential upside is limited to 3.5% to our fair value

Results were disappointing

4Q10 revenues were up 3.7% y-y to S$225.1m, while net profit was down 41.4% y-y to S$22.7m. For FY2010 revenues came in at S$938.2m (+3.6% y-y), which was slightly ahead of our expectations of S$932 due mainly to higher riderships, higher rental revenues and fees from overseas projects. Operating expenses has taken its toll on SMRT as total operating expenses increase 10.1% y-y to S$206.6m due mainly to higher staff costs, higher maintenance and repair costs. This came as a surprise as FY2010 was supposed to result in lower operating costs due to the global recession. As a result, net profit edge up marginally to S$162.8m (+0.1% y-y).

Bright spot for FY2010

SMRT announced a final dividend of 6.75 cents bringing the total dividends for FY2010 to 8.5 cents, this is much higher than the 7.75 cents for FY2009. The dividend increase was on the back of flat earnings growth which means payout was much higher for 2010 and we are hopeful that the management will maintain the higher payout for FY2011.

Outlook and estimates for FY2011

We are forecasting revenues to increase by 7%to S$1.0 billion to reflect the higher earnings from higher ridership numbers, higher rental and advertisement. Train riderships are expected to grow as circle line stage 1 & 2 starts to contribute with LTA forecasting daily riderships to reach 200,000 eventually and average fares will likely edged up. We are expecting rental and advertising segment to grow strongly in 2011; the opening of Esplanade Exchange and various circle line stages coupled with the better economic outlook will generate more space and higher rates. Advertising will likely benefit from the upcoming Youth Olympics, World Cup and the opening of 2 integrated resorts. However the management guided that operating costs will be likely be higher with the increased headcount, higher electricity prices and cessation of the budget assistance package.

Valuation and Recommendation

We are maintaining our Hold recommendation but downgrading our fair value estimate to S$2.36 to reflect the higher operating costs environment for 2011. SMRT could be impacted by higher electricity prices, labour costs and higher repair costs, as its fleet of buses and trains gets older. SMRT is currently trading at 21.3X FY10 earnings, which is 22% higher than its historical average of 16.6X and close to its all time high of 22.2X, maintain Hold. We derived our fair value using the DCF model and the model is based on a risk free rate of 2.78% and 1% terminal growth.

We are maintaining our Hold rating and downgrading our fair value estimate to S$2.36 from S$2.42 representing a potential upside of 3.5% from the closing price.

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