SMRT – BT

Analysts expect bumpy ride for SMRT

OCBC says higher operating expenses are expected to eat into its FY12 income

AS 12 more stations on the Circle Line open on Oct 8, analysts will also be watching if the boost in ridership meets expectations for SMRT Corporation.

Within the next six to nine months, the ridership is expected to increase from an average of 180,000 to about 400,000 commuters, with 28 stations fully accessible as part of the $8 billion network project.

‘Currently, the Circle Line’s daily ridership remains stagnant at about 180,000 on average (or over 200,000 during peak hours), which is still a way to go from the group’s projected break-even ridership of 350,000 per day,’ said Nomura in a recent report.

The lower-than-expected growth in ridership along the Circle Line compares with the 6.4 per cent year-on-year rise in overall rail ridership at the group’s three main lines in August, Nomura noted.

But the brokerage said this reflects more the fact that the North-South and East-West mass rapid lines continue to experience strong ridership growth.

The news of the full Circle Line operation – excluding an extension at two existing stations that will be completed in the first quarter of 2012 – provides ‘temporary reprieve from otherwise negative publicity’, OCBC Investment Research said in a client note.

And there has been a lot of bad news for the transport operator of late.

Last Tuesday, a power trip stalled train services on the entire Circle Line during the morning rush hour, with about 26,600 commuters affected by the four- hour breakdown.

Transport Minister Lui Tuck Yew has called for a thorough investigation and said SMRT would be penalised if found to be at fault.

Then, last month, a north-bound SMRT train that had been spray-painted with graffiti was found – making this the second case of vandalism and security breach in two years.

SMRT is also fighting a lawsuit by the family of a Thai teenager who had lost both her legs after falling onto the tracks at the Ang Mo Kio MRT station in April.

OCBC said that higher operating expenses are expected to eat into SMRT’s fiscal 2012 earnings, which should come in lower than its earnings for fiscal 2011.

‘With the six to nine month lead-time required to ramp-up and stabilise ridership levels, we view the Circle Line’s operating profit contribution to be negative for FY12.’

By Nomura’s estimates, the Circle Line should contribute pre-tax losses of $20 million this year, which should shrink to $3 million next year.

Still, OCBC is sanguine, saying that SMRT could benefit from electricity prices heading lower due to the poor economic outlook, and more opportunities in the rental space and advertising area. It kept its ‘buy’ rating on the stock and a fair value of $2.04.

Nomura held a ‘neutral’ rating on the stock and a target price of $2.05.

It said the stock’s valuation of 20 times its fiscal 2012 earnings is ‘demanding’ though SMRT’s dividend yield of 4.8 per cent stays attractive.

Nomura has a ‘buy’ rating on competitor ComfortDelGro, saying its valuations are more compelling.

Shares of SMRT lost one-and-a-half cents to end at $1.76 on Friday.

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