SMRT – CIMB

Circle Line ridership below expectations

Below; maintain NEUTRAL. 1Q11 net profit slipped 20.7% yoy to S$38.2m, 13% below our forecast (22% of our FY11 estimate) and consensus estimate due to higher-than-expected operating expenses. To incorporate this, we have cut our FY11-13 earnings estimates by 7-12%. Our DCF-derived target price accordingly dips from S$2.35 to S$2.31 (WACC 9%, terminal growth 2%). Maintain NEUTRAL as we believe SMRT’s earnings will continue to be hurt by a 2.5% fare reduction and higher operating expenses. In line with expectations, no dividend was declared. We see re-rating catalysts from higher-than-expected Circle Line ridership and lower-than-expected electricity costs.

EBIT fell 20.3% yoy. Revenue grew 9.0% yoy, with contributions from the Circle Line Stages 1 & 2, higher rental revenue and higher bus ridership, partially offset by lower revenue from Palm Jumeirah. Staff costs rose 9.8% yoy. Electricity and diesel expenses rose 28.8% yoy on costlier energy while repairs and maintenance went up 8.9% due to more scheduled repairs and maintenance for trains and taxis.

Challenging outlook. We expect fare-based revenue to be affected by the 2.5% fare reduction effective Jul 10. Since the opening of Stages 1 & 2, Circle Line’s average daily ridership has risen from 124k to almost 145k. Still, this is below the 200k expectation. According to SMRT, the lower-than-expected ridership and rise in electricity costs will continue to affect the Line’s profitability. While SMRT expects Circle Line’s ridership to improve, it believes the Line will continue to operate at a significant loss over the next one year. Furthermore, staff and electricity costs are expected to be higher yoy. However, SMRT expects rental revenue to be higher yoy thanks to additional rental space.

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