SMRT – BT

Time to board the train

Sell-down likely overdone. SMRT’s share price immediately slumped by 5.7% the next trading day following its 4QFY10 results, as a hike in its operating expenses (opex) had caused the bottomline to miss market’s expectations. We reckon that the market, which may have been overly optimistic previously, is now concerned that the ramp up of the Circle Line (CCL) may damp its profitability going forward, if its 4Q opex is used as a new baseline to estimate the incremental costs. However, our analysis of its historical quarterly opex shows that the 4Q results may possibly include an element of seasonality. Specifically, we observe that opex as a percentage of revenue is traditionally higher in 4Q, due possibly to year-end maintenance or staff bonuses, etc. Therefore, while we acknowledge that its 4Q results, to a certain extent, were impacted by operating costs from CCL, we believe that its most recent 4Q opex may not be the best reference point for its expected costs and that the sell-down due to this issue may be been overdone.

Healthy operating statistics. Operationally, we are still keenly positive on its developments of its core business segments. Monthly statistics provided by SMRT showed that the total monthly MRT ridership had jumped by 12.0% YoY (-2.2% MoM) in Apr, as opposed to 2.3% YoY growth (-4.4% MoM) in Apr 2009. Its monthly bus ridership similarly clocked a robust YoY growth of 6.3% (+13.8% MoM) in Mar, indicating healthy growth momentum in its bus operations. While management does not disclose the monthly progress on its rental space, we are optimistic that the group will be able to achieve a S$6m increase (+9.2%) in rental revenue for FY11 (as guided by management), considering the addition of rental space and encouraging take-up rates at Esplanade Exchange.

Upgrade to BUY. In the longer term, we continue to like SMRT for its growth story in the public transport sector space, its consistently strong operating cashflows and dividend payouts. We maintain our view that the group is likely to capture a significantly higher ridership with the progressive opening of CCL stations (LTA expects ridership of 0.5m/day, when fully operational). Together with a return of tourism, opening of integrated resorts and major events (e.g. F1 Grand Prix, YOG), that should bolster its performance in FY11. We are upgrading SMRT to BUY with S$2.33 fair value (maintained) as the recent weakness in its share price now presents a good opportunity to accumulate the stock.

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