SMRT – CIMB

Muted outlook

Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.

Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.

Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.

SMRT – CIMB

Muted outlook

Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.

Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.

Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.

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