SMRT – AmFraser

A second round of disappointment

• SMRT Corp Ltd results surprised the market on the downside: in addition to net profit fall of 21% YoY to $38.2mil in 1QFY11, management now guides “the profitability of FY2010 may not be maintained.”

• As we were at the low-end of the full-year forecast range with FY11F EPS at 10.3 cents representing 4% YoY fall, we are comfortable maintaining our estimates. We also maintain our Fair Value at $1.99

and HOLD rating.

• SMRT’s fare business – i.e. train and bus operations which account for 78% of operating revenue

– saw sharply lower operating profit. Operating margins for MRT plunged to 21% from 32% year ago, while bus business went into operating loss of $0.8 mil, compared to $1.2mil in 1QFY10.

• MRT daily ridership growth of 13% YoY to 1,589 in 1QFY11 and 8% YoY to 833 for bus, gives little encouragement against unavoidable cost pressures. While 1QFY11 margins improved from the first round of nasty surprise in 4QFY10, managment guides that “the new Circle Line will continue to operate at a significant loss over the next 12 months.” Circle Line 1,2 and 3, reached daily ridership of 145,000, but this still falls far short of projected 200,000.

• 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 cost increases. At the same time, savings from Jobs Credit will cease from July 2010.

• In 1QFY11, staff costs rose 10% YoY due to 3% rise in headcount to 6,600, and made up 39% of total operating costs. At the same time, fuel costs jumped 29% YoY due to higher prices and consumption,

and accounted for 20% of total operating costs.

• After neutralized impact in 1QFY11 from fare cuts implemented on 1 April 2009, average MRT fare fell 1% YoY to 89.7 cents while that for bus fell 2% YoY to 65 cents. 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.

• A buoyant economy continued to boost the segments of rental of commercial space and advertising. Combined, revenues rose 13%, and made up 10% of total operating revenues. SMRT’s lettable space expanded 8% YoY to 31,217 sq m with average occupancy rate ar 98.6%.

• Other disappointments: (1) Despite 3% rise in taxi revenue, operating profit dived 41% YoY due to higher repair and maintenance costs as well as increased hirer benefits paid out. (2) Client Nakheel PJSC is terminating its contract with SMRT for the operation and maintenance of Palm Jumeirah.

• Capex projection is now slightly tempered to S$150mil for FY11F, with $30-40mil allocated for taxi operations and about S$50mil for train.

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