SMRT – DBSV

Curse of the Circle

1Q11 plunged 21% yoy; below expectations due to higher costs despite higher ridership

FY11F cut by 6.5%; expect street to cut more given optimistic estimates

Market overlooked near term humps with shares trading close to peak PE of 21x. Maintain Fully Valued, TP cut to S$1.88

1Q11 plunged 21% yoy, below expectations; FY11F cut by 6.5%. 1Q11 results came in below our expectation (6% below consensus on our original FY11F forecasts). We have cut FY11/12F earnings further by 6.5%/4.0% on higher operating costs, coupled with slower-than-expected ramp up in Circle Line (CCL) ridership growth. We believe street estimates may be lowered by a larger magnitude given higher estimates.

Revenue +9%; expenses up by a higher +13% = PBIT down 20%. 1Q11 revenue grew 9% yoy to S$235.3m on higher MRT/bus ridership, rental revenue, partially offset by lower revenue from Palm Jumeriah Monorail. Expenses grew by a higher 13% on staff costs (+10%), electricity & diesel (+29%) and others (+19%). EBIT margins dipped 7.2ppt to 19.6%.

CCL ridership of 145k/day is below target of 200k/day; losses to continue. Average ridership on Circle Line is c.145k/day with the commencement of Stage 1&2 from 17 Apr, but this is below the 200k/day ridership originally expected. Management expects the line “to operate at a significant loss over the next 12 months”, despite expectations of improving ridership.

Reiterate Fully Valued, TP cut to S$1.88. We believe that the counter is overvalued. While the long-term prospect for rail in Singapore is positive, we believe the market has overlooked near term humps, with SMRT trading at peak PE of c.21x. Our TP is adjusted down to S$1.88 on lower earnings, based on the average valuation using 15x PE ( FY11F) and DCF. We reiterate our Fully Valued recommendation.

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