SMRT – BT

Rough ride over the next year for SMRT

SMRT Corp’s first-quarter results may be setting the stage for the year ahead – one potentially fraught with continuing losses from its Circle Line operations and rising costs putting the squeeze on profit margins.

For its fiscal first quarter ended June 30, SMRT registered a 20.7 per cent fall in net profit to $38.24 million, despite revenue rising 9 per cent to $235.34 million. SMRT has also cautioned that it may not be able to maintain FY2010’s profitability for the current financial year ending March 31, 2011.

SMRT’s shares closed at $2.05 yesterday, having shed 17 cents since July 30, when it closed at $2.22.

Since the debut of the Circle Line, ridership on the new line has risen from a daily average of 124,000 to nearly 145,000, though the break-even target lies at about 200,000.

SMRT expects Circle Line ridership to improve, but the line will continue to operate at a significant loss over the next 12 months, it has said.

As further phases to the line are launched, the Circle Line will rack up additional expenditure in terms of staff and related costs as well as energy expenses, which will mean further cost pressures.

DMG Research pointed out in a report earlier this week that ‘CCL operations could remain a drag on earnings for FY11-12, considering that Stages 4-5 will only be completed in 2H11 (SMRT’s FY12), and may require a period of gestation to provide any possible accretion to SMRT’s bottom line’.

Costs were another bugbear for the transport company during the quarter, as electricity and diesel expenses shot up 29 per cent to $30.2 million, on the back of higher average tariff and electricity consumption as well as higher diesel prices.

Where diesel costs are concerned, a hedging policy – there is no hedge in place at the moment – may have helped the group better manage the volatility in diesel prices.

While the board has approved a hedging policy, its CFO said in a conference call last week that when the policy is implemented will depend on how diesel prices play out.

Where electricity is concerned, SMRT has a one-year fixed-rate contract in place that expires in September. It is currently ‘monitoring electricity prices and will assess (its) options’, an SMRT spokesman said.

According to a Nomura report, a 5 per cent increase in staff costs would translate to a 7-8.5 per cent decline in group Ebit (earnings before interest and taxes), while a 5 per cent rise in electricity and diesel costs was estimated to result in a 2.5-3.5 per cent decline in group Ebit.

Not helping the situation is the early termination of its contract to operate and maintain the Palm Jumeirah Monorail in Dubai, a contract which was to expire in 2015.

While the earlier-than-anticipated termination is not expected to have any material impact on SMRT’s consolidated net tangible assets per share and earnings per share for the current financial year, it is seen as a setback to the group’s efforts to grow its operations outside Singapore.

One bright spot for the group, however, is its retail business, which continues to grow, helping to prop up the bottom line.

Both the advertising and rental businesses – which collectively contributed 38 per cent to Q1 operating profit – are flourishing as the economy continues to improve. The new Circle Line stations as well as refurbished train stations will also mean increased lettable space.

Still, even combined, the $17.6 million in operating profit derived from these two businesses trails behind its train segment, which contributed about 60 per cent to Q1 operating profit with some $27.7 million.

Given this, SMRT will need to keep a stricter eye on its core business and work harder at managing costs, in order to better weather the ‘challenging outlook’ it expects over the next 12 months.

SMRT – BT

Rough ride over the next year for SMRT

SMRT Corp’s first-quarter results may be setting the stage for the year ahead – one potentially fraught with continuing losses from its Circle Line operations and rising costs putting the squeeze on profit margins.

For its fiscal first quarter ended June 30, SMRT registered a 20.7 per cent fall in net profit to $38.24 million, despite revenue rising 9 per cent to $235.34 million. SMRT has also cautioned that it may not be able to maintain FY2010’s profitability for the current financial year ending March 31, 2011.

SMRT’s shares closed at $2.05 yesterday, having shed 17 cents since July 30, when it closed at $2.22.

Since the debut of the Circle Line, ridership on the new line has risen from a daily average of 124,000 to nearly 145,000, though the break-even target lies at about 200,000.

SMRT expects Circle Line ridership to improve, but the line will continue to operate at a significant loss over the next 12 months, it has said.

As further phases to the line are launched, the Circle Line will rack up additional expenditure in terms of staff and related costs as well as energy expenses, which will mean further cost pressures.

DMG Research pointed out in a report earlier this week that ‘CCL operations could remain a drag on earnings for FY11-12, considering that Stages 4-5 will only be completed in 2H11 (SMRT’s FY12), and may require a period of gestation to provide any possible accretion to SMRT’s bottom line’.

Costs were another bugbear for the transport company during the quarter, as electricity and diesel expenses shot up 29 per cent to $30.2 million, on the back of higher average tariff and electricity consumption as well as higher diesel prices.

Where diesel costs are concerned, a hedging policy – there is no hedge in place at the moment – may have helped the group better manage the volatility in diesel prices.

While the board has approved a hedging policy, its CFO said in a conference call last week that when the policy is implemented will depend on how diesel prices play out.

Where electricity is concerned, SMRT has a one-year fixed-rate contract in place that expires in September. It is currently ‘monitoring electricity prices and will assess (its) options’, an SMRT spokesman said.

According to a Nomura report, a 5 per cent increase in staff costs would translate to a 7-8.5 per cent decline in group Ebit (earnings before interest and taxes), while a 5 per cent rise in electricity and diesel costs was estimated to result in a 2.5-3.5 per cent decline in group Ebit.

Not helping the situation is the early termination of its contract to operate and maintain the Palm Jumeirah Monorail in Dubai, a contract which was to expire in 2015.

While the earlier-than-anticipated termination is not expected to have any material impact on SMRT’s consolidated net tangible assets per share and earnings per share for the current financial year, it is seen as a setback to the group’s efforts to grow its operations outside Singapore.

One bright spot for the group, however, is its retail business, which continues to grow, helping to prop up the bottom line.

Both the advertising and rental businesses – which collectively contributed 38 per cent to Q1 operating profit – are flourishing as the economy continues to improve. The new Circle Line stations as well as refurbished train stations will also mean increased lettable space.

Still, even combined, the $17.6 million in operating profit derived from these two businesses trails behind its train segment, which contributed about 60 per cent to Q1 operating profit with some $27.7 million.

Given this, SMRT will need to keep a stricter eye on its core business and work harder at managing costs, in order to better weather the ‘challenging outlook’ it expects over the next 12 months.

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