SMRT – Phillip

FY11 results within Expectations

Flat profit growth in FY11 within expectations

Factored in expectations of higher depreciation and energy expenses

Trimmed profit estimates by 2.8-6.8% for FY12-13E

Proposed final dividend of 6.75C

Maintain Buy with revised target price of S$2.22

FY11 results discussion

Despite the 8.3% growth in revenue, SMRT recorded a slight decline in net profit of S$161.1mn for FY11. The main sources of profit margins erosion came from a 6% increase in staff cost and a 17% increase in energy expense. Despite fairly similar average headcounts for both years, staff cost was higher in FY11 as there was lower jobs credit shield as compared to FY10. Energy cost was higher due to increased train runs following the commencement of CCL operations in April 2010 and higher average unit energy cost. Overall, the results were in line with our expectations of S$162.1mn.

Valuation

We used a blended valuation model of DCF (COE: 7.2%, terminal g: 1%) and P/E (18.0X FY12e PATMI) to arrive at our target price of S$2.22. Our reduction in target price from S$2.30 is mainly due to reduced profit estimates after factoring higher energy & depreciation expense in our forecasts. We keep our buy recommendation unchanged and expect a total return of 21.2% after incorporating a dividend yield of 4.5%.

Segmental discussion

MRT, LRT and Bus revenue increased by 6.7-9.6%, despite lower average fares following the implementation of distance based fare system and fare reduction exercise in FY11. This revenue increase was attributable to a 7.5-12.6% increase in ridership on the rail and bus systems. Both the Bus and LRT business continued to record losses, while MRT business recorded a 13% decline in EBIT contributions. Circle line’s (CCL) ridership continued to grow for the quarter to 181k, but is expected to continue making losses. CCL Stages 4 & 5 is scheduled to open in October 2011 and we expect significant increase in rail ridership towards the end of FY12.

Ancillary businesses were the key support to the Group’s profits as both advertising and rental operations recorded a 13% increase in sales. In FY11, ancillary business (rental, advertising & engineering) contributed 45% to the EBIT of the Group.

Forecasts and guidance

The only major surprise during the results briefing would probably be the guidance for S$600mn of CAPEX to be spent in FY12, which is significantly higher than the S$91-139mn/yr of CAPEX over the past 5yrs. This would be spent mainly for 22 trains (c.S$300mn), buy-over of Changi & Dover (c.S$100mn), 50 buses and fleet renewal for taxis. We believe that this would result in a significant increase in depreciation expense for FY12. Based on the cash balance of S$376mn on the books, we also believe that debt issuance is likely in order to maintain a more balanced capital structure. Hence, we factored in an increase of S$300mn in debt into our forecasts.

SMRT also guided for an expected increase in rental revenue of S$7mn for FY12, following the expected opening of Orchard Exchange (2,300sqm) in the second quarter of 2011 and the completion of renovations at several other stations throughout FY12. As rental operations are highly profitable (EBIT margin: c.77%), we believe that this incremental rental revenue would give a substantial boost to the bottom line of the group.

Overall, we do not expect FY12 to record exciting profits as the expected increase in ridership would likely be offset by higher operating expenses. Following the opening of CCL stage 4 & 5 in Oct, we expect profit growth to bottom out in the coming financial year before growing in FY13. After incorporating the new information, we trimmed profit estimates by 2.8-6.8% for FY12-13E.

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