SMRT – DBSV

4Q above, but cost headwinds linger

At a Glance

• 4Q/FY11 results above ours but within consensus’ expectations

• Strong 4Q growth due to low base in 4Q10 and lower-than-expected rise in electricity, diesel and staff costs

• Cost concerns likely to linger, especially with volatile oil price, which is unhedged

• Maintain Hold, TP revised slightly to S$2.08

Comment on Results

4Q/FY11 results in above. SMRT’s 4Q net profit at S$34m (+50% y-o-y) was above ours, but within market expectations. FY11 posts a marginal decline of 1.1% in net profit to S$161.1m, vs our forecast of S$148m due to a lower than expected rise in electricity/diesel, and staff costs. 4Q EBIT margins improved to 16.9% (4Q10: 12%) as costs rose by a slower clip than topline. A 6.75 Scts final dividend was proposed; coupled with interim dividend of 1.75 Scts equates to a payout of 80% (FY10: 8.5 Scts).

Rail and rental remain key EBIT contributors, collectively accounting for c.97% of Group’s EBIT. This is partially offset by losses from Taxis (-S$3.9m), Buses (-S$1.8m), and LRT (-S$0.1m). Taxi losses came about from higher depreciation, insurance costs, and write off of property, plant and equipment.

Circle Line (CCL) still below breakeven, but losses narrowed. Average ridership at CCL is currently around 180k/day, which is a marked improvement from the 30k/day when it first started. Operating losses continued, but has narrowed, as it is still below the 200k/day, which is estimated for breakeven.

Recommendation

Maintain Hold, TP revised slightly to S$2.08. Despite a better than expected performance in 4Q, we expect cost pressures to continue to plague the bottomline. This should come about from the volatile oil prices (which currently remains unhedged), coupled with higher staff costs. We believe these concerns will linger and cap share price gains in the near future, with support from a healthy yield of c.4.5%. As such, we maintain our Hold recommendation with a PE/DCF backed TP of S$2.08.