SMRT – Kim Eng

Circle line losses to taper off soon

Event

• While 3Q11 net profit formed a seemingly large 28% of our full year forecast, higher staff costs in 4Q11 ahead of the opening of Circle Line Stages 4&5 in 2011. Also, 4Q profit is expected to be hurt by higher scheduled train repair & maintenance costs. Having said that, Circle Line ridership is creeping closer to the 200k breakeven level. Also, although 4Q staff costs will rise, there is a buffer from lower staff costs seen since 2Q11 following Palm Jumeirah’s demobilisation. We are raising our target price to $1.97 as we roll forward target valuation to FY12. We rate the stock a HOLD.

Our View

• 3Q11 net profit rose 10% YoY to $43m or 4% if 3Q10 is adjusted for Jobs Credit subsidies and a $6.6m provision for goodwill impairment. Operating profit rose 6% YoY as higher rental and advertising income made up for lower Train profit, losses by LRT and Bus and lower contribution from Taxi.

• Higher oil prices resulted in higher cost of electricity and diesel. Energy costs rose 14% YoY to $31m while “other” costs, mainly diesel sold to taxi hirers, rose 19% YoY from 3Q10 (base adjusted for train goodwill). SMRT is currently unhedged for diesel and electricity as management wants to wait for clearer trends after the winter.

• SMRT will hire another 150200 staff from 4Q11 for the opening of Circle Line Stages 4&5 sometime in 2011. This will lead to higher staff costs in 4Q11 and 1Q12, depending on the speed of the hiring exercise. However, ridership of 163k has improved from 154k in 2Q11, and is creeping up toward the 200k needed to break even. At this rate, losses should continue to reduce every quarter.

Action & Recommendation

We roll forward our target valuation to 17x FY12 EPS, thus raising our target price to $2.20. We rate the stock a HOLD. Prefer ComfortDelgro.

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