SMRT – AmFraser

Forecasts cut, fair value reduced

• SMRT Corp Ltd results came in sharply below ours and market expectations, at 10% below consensus EPS of 11.9 cents Singapore.

• We have cut EPS by 3%-4% to 10.3 cents for FY11F and 10.9 cents for FY12F. The lowered operating performance also reduces our fair value by 9% to S$1.99. Stock now trades at premium of less than 15% and we maintain our HOLD rating.

• Only bring spot is a hike in DPS to 8.5 cents for FY10 (7.75 cents in FY09), with final 6.75 cents declared. We believe this would be possible to maintain going forward; however, on recent price surge, yield of 4% p.a. is not compelling.

• SMRT’s 4QFY10 expense growth of 10% YoY, brought operating profit plunge of 28% to S$27mil. This muted FY10’s operating profit growth to 5% YoY. Lower interest and investment income and higher tax rate at 15%, led to flat net earnings of S$163mil.

• Nasty cost surprises were particularly in the area of staff, and repair and maintenance. This hit operating profit margins hard for train and bus operations. Margins in 4QFY10 for train fell to 64% while bus fell to -11%, versus 70% and 3% respectively for 4QFY09. Going forward, firm oil prices caps potential for upside surprises.

• Ramped up requirements for line CCL 1 and 2 since April 2010 opening, and preparation for CCL 4 and 5 (13 stations) opening in FY12, will ensure no let up in such cost increases. At the same time, savings from Jobs Credit will cease from July 2010.

• SMRT’s fare business performed in line with expectations at topline – FY10 ridership grew 5% YoY to 536.6 million for train and +0.7% YoY to 290 million for bus – though faring worse than FY09 due to a weak 1HFY10. One encouraging note was a pick up in momentum for 4QFY10, with 10% YoY for train and 3% YoY for bus.

• We maintain our FY11 ridership forecast at 9% YoY for train and 6% YoY for bus; buoyed by a strong economy as well as enhanced attractiveness of public transportation with progressive stages of CCL. The Land Transport Authority projects 200,000 ridership for operational CCL 1, 2 and 3.

• Fare cuts implemented on 1 April 2009 resulted in 4% YoY fall in average train fares and 6% YoY fall in average bus fares for FY10. The new fare structure from July 2010 will be mildly positive, offsetting much of the end to a 3% temporary cut for April 2009 to June 2010.

• One bright spot in non-fare business is that management expects incremental revenue of S$6mil in FY11 from new commercial space to be added at nine stations – of which Orchard and Esplanade Xchange will account for a combined 3,600 sq m.

• Management plans to add to its current taxi fleet of 2,572 as well; however on rising COE prices, yield would be less attractive. Capex projections is now raised to S$150-S$200mil for FY11.

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