SMRT – OCBC

1QFY11 bottomline disappoints

Below expectations. SMRT Corporation reported 1QFY11 revenue of S$235.3m (+9.0% YoY, +4.6% QoQ), driven mainly by higher MRT and bus ridership, contribution from Circle Line (CCL) Stages 1 and 2, and higher rental revenue. This is largely within our expectation of S$233.4m revenue for the quarter. However, other operating income (OOI) fell by a steeper-than expected 66.8% YoY (-48.6% QoQ) due to lower other maintenance and related income. Hence, while we have adequately factored in an increase in operating costs, as guided by management in its 4QFY10 results, PATMI of S$38.2m (-20.7% YoY, +68.8% QoQ) missed our earnings expectation of S$41.8m. The quarterly topline and bottomline formed 24.4% and 22.9% of our FY11F sales and PATMI forecasts respectively (24.0% and 21.5% of consensus).

Management warns of lower profitability in FY11. SMRT revealed that the average daily ridership from CCL since the opening of Stages 1 and 2 had risen to 124-145k, as compared to ~40k from Stage 3 alone. This is consistent with our projection of 135k, but lower than LTA’s expected ridership of 200k. Management warns that this shortfall in ridership, coupled with rising electricity costs, is likely to result in CCL operating at significant loss over the next 12 months. In addition, staff and related costs are expected to add further burden to its operations, due mainly to the absence of jobs credits (S$1.2m in reported quarter vs. S$4.4m in 1QFY10), increased headcount and higher CPF rates. The group also guided that OOI should normalize to ~S$20m for FY11 due to absence of one-off items in FY10 (which helped to lift its FY10 contribution to S$43.2m). Thus, while rental revenue is expected to be higher in FY11 with increased lettable retail space, management cautions that its profitability in FY11 may not be maintained.

Downgrade to HOLD. In light of the results and challenging outlook, we now ease our FY11F earnings by 8.2%. We also tweak our dividend assumptions and parameters of our DDM model to match our earnings revision and to reflect the stock’s higher systematic risk (cost of equity: 6.4%, terminal growth rate: 2% currently). This eases our fair value to S$2.16 from S$2.33 previously. While we are positive on SMRT’s growth story in the public transport sector space in the longer term, we believe the drag in its profitability is likely to limit its upside potential in share price in near term. At current level, we downgrade SMRT to HOLD on valuation grounds.

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