SMRT – OCBC

Better connectivity with Tuas West Extension

Tuas West Extension a positive for SMRT… Transport Minister Mr Raymond Lim shed more light on details of the Tuas West Extension on Wed. The new MRT line, which is 7.5km long and consists of four aboveground stations, will extend the existing East-West Line from Joo Koon into Tuas West. We understand that the rail project is projected to cost S$3.5b and will encompass the costs of the new stations, 13 new trains, a 26ha depot and a road viaduct running along the MRT line. When operational in 2016, the extension is expected to serve 100k passengers daily. We see SMRT as the main beneficiary of this development, as it is poised to capture more ridership from this significantly improved connectivity.

…although near-term pressures still exist. In the near term, however, we maintain our view that SMRT is likely to face challenging business conditions due to continuing losses from the Circle Line (CCL) and inflationary cost pressures. In the same announcement, the Transport Minister also updated that the rest of the CCL (Stage 4-5) is expected to open in 4Q11, while the CCL Extension from Promenade to Marina Bay Station is likely to be ready in 2012. As management has previously guided that the CCL network is not expected to breakeven until the line becomes fully operational, this supports our view that the CCL will continue to be the main drag on its bottomline in the coming months. Moreover, the higher operating costs associated with the ramp up of the CCL operations may be aggravated by an overall increase in energy costs. According to US Energy Information Administration (EIA) and Energy Market Company (EMC), both the recent wholesale electricity prices as well as the 2011 WTI crude oil price forecast are showing a positive trend. This suggests that SMRT may face further pressures on its operating costs.

Maintain HOLD and S$2.16 fair value. In view of the above reasons, we are keeping our cautious view on SMRT, notwithstanding the positive long-term growth prospects in the public land transport sector. We also maintain our FY11-12 forecasts and DDM-based fair value of S$2.16 pending the release of its 3QFY11 results on 28 Jan 2011. At current price level, upside potential appears limited (although the impending outcome of Downtown Line operator tender may influence its share price). Maintain HOLD on SMRT based on valuation grounds.

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