SMRT – DBSV

Growth dampened by higher costs

At a Glance

• 2Q11 net profit of S$45.8m (-13% yoy) in line

• Higher ridership and commercial revenue offset by higher electricity, maintenance and staff costs

• Maintain Fully Valued, TP: S$1.88

Comment on Results

2Q11 in line with expectations. 2Q11 net profit was down 13% yoy to S$45.8m, largely due to higher energy, maintenance and staff costs. Revenue rose 7.2% yoy to S$246m on higher rail ridership revenue (+13% yoy), advertising revenue (+24% yoy), and rental income (+16% yoy). The results were in line with our expectations and on track to meet our full year forecasts.

Higher ridership plagued by lower average fares and low ridership on CCL. Although rail ridership improved on higher train frequency and Circle Line (CCL) stages 1 & 2, average fares declined c.1% as a result of distance-based fares from 3 July 2010. Circle Line continues to underperform as ridership base was 154,000, below the 200,000 target.

Operating income dampened by higher maintenance, staff and energy costs. Energy costs remained high (+24% yoy) from higher consumption, tariffs and diesel price. Staff costs increased (+7% yoy) as jobs credit scheme ended in June 2010. More maintenance works on trains and on ageing taxi fleet increased maintenance expenses (+11% yoy).

Recommendation

Maintain Fully Valued, TP S$1.88. We do not expect any positive revision to earnings as CCL continues to be loss making. Furthermore, operating costs are expected to remain high. However, we expect revenue and ridership to continue to grow on higher train frequencies and CCL ridership. We maintain our earnings forecasts and TP of S$1.88 based on average of 15x FY10F/11F PE and DCF (WACC 7.2%, 1%). Maintain Fully Valued.

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