SMRT – Phillip

Rideship update

Rail ridership grew 13.4% y-y in August (YTD: 11.8%)

Bus ridership grew 6.8% y-y in August (YTD: 5.8%)

Operating costs likely to be a drag on 2Q11 results

Forecasting revenue to come in at S$247m and net profit of S$43.7m

Maintain Hold recommendation with a fair value of S$2.18 (unchanged)

Rail ridership grew 13.4% y-y while bus ridership grew 6.8% in August

Rail ridership for Aug’10 grew 13.4% y-y with full contribution from the circle line, while rail ridership for the first 8 months grew 11.8% y-y (forecast: 10% growth). Bus ridership for August grew 6.8% y-y (YTD: 5.8%). We are seeing double-digit growth rate in the rail sector for 5 consecutive months as COEs prices remained high and a low unemployment rate likely contributed to the strong growth. Average fares are likely to trend higher after the implementation of distance based fares.

Results preview for 2Q11

We are expecting revenue for 2Q11 to come in at S$247.3m with net profit of S$43.7m on the back of higher riderships and mega events during the quarter which is likely to contribute strongly to the advertising revenue. Operating costs continue to be a drag on earnings due to higher maintenance costs while electricity cost is likely to fall slightly as average prices for the Jul-Sept’10 fell to US$78/ barrel from US$83/ barrel a quarter ago. SMRT will be releasing their 2Q11 results next Friday (29th October 2010) after the market closes.

Maintain Hold with a fair value of S$2.18 ( unchanged)

We are maintaining our Hold recommendation on SMRT as the current price of S$2.05 represent little upside to our fair value of S$2.18. Transport operators like SMRT are unlikely to do well during inflationary times as they unable to increase prices of fare to match the increase in costs due to regulatory requirements. SMRT is currently trading at about 18.5XFY11E while our target price of S$2.18 represents a forward P/E of 19.6X (FY11 estimated earnings). We are advising investors to switch to Comfort Delgro 14.7X FY10 estimated earnings) for exposure to land transport sector.

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