SMRT – Kim Eng

Coming full circle

Event

• The final two stages of the Circle Line (CCL) will start operations from tomorrow. There will be 12 new stations, bringing the total number of CCL stations to 28. We understand that an extension with another two stations stretching from Promenade to the Marina Bay area will be launched in 1Q12. Despite the potential jump in ridership, we expect higher energy costs as a result of increased train runs to weigh on SMRT’s EBIT margin. Reiterate HOLD.

Our View

• The average ridership on the CCL currently is about 180,000 per day. With the opening of Stages 4 and 5 tomorrow, SMRT aims to achieve breakeven ridership of 330,000 per day in 69 months’ time once commuters’ travel patterns stabilise. In our view, this projection seems overly optimistic given that the gestation period may be longer than expected. Ultimately, management targets a steadystate ridership of 400,000500,000 daily.

• Rail revenue, however, will continue to lag ridership growth because of lower average fares with the implementation of the distancebased fare system in July last year. We expect margin pressure to persist in the next few quarters with increased train frequency, which will further bump up electricity consumption. But there will be respite for SMRT from lower average tariffs in 2HFY Mar12 following the recent slide in fuel oil prices.

• Rental income, on the other hand, should receive a boost as retail space totalling 868 sq m at three new CCL stations – Holland Village (596.2 sq m), onenorth (248.3 sq m) and Botanic Gardens (23.5 sq m) – has been fully leased out. According to management, the entire CCL with a combined retail space of 3,150 sq m, or 80 shops, now enjoys a high occupancy rate of more than 90%.

Action & Recommendation

With no major nearterm catalysts in sight, we maintain our HOLD recommendation on SMRT with a target price of $1.82. The share price should be wellsupported by a decent dividend yield of almost 5%.

SMRT – Kim Eng

Coming full circle

Event

• The final two stages of the Circle Line (CCL) will start operations from tomorrow. There will be 12 new stations, bringing the total number of CCL stations to 28. We understand that an extension with another two stations stretching from Promenade to the Marina Bay area will be launched in 1Q12. Despite the potential jump in ridership, we expect higher energy costs as a result of increased train runs to weigh on SMRT’s EBIT margin. Reiterate HOLD.

Our View

• The average ridership on the CCL currently is about 180,000 per day. With the opening of Stages 4 and 5 tomorrow, SMRT aims to achieve breakeven ridership of 330,000 per day in 69 months’ time once commuters’ travel patterns stabilise. In our view, this projection seems overly optimistic given that the gestation period may be longer than expected. Ultimately, management targets a steadystate ridership of 400,000500,000 daily.

• Rail revenue, however, will continue to lag ridership growth because of lower average fares with the implementation of the distancebased fare system in July last year. We expect margin pressure to persist in the next few quarters with increased train frequency, which will further bump up electricity consumption. But there will be respite for SMRT from lower average tariffs in 2HFY Mar12 following the recent slide in fuel oil prices.

• Rental income, on the other hand, should receive a boost as retail space totalling 868 sq m at three new CCL stations – Holland Village (596.2 sq m), onenorth (248.3 sq m) and Botanic Gardens (23.5 sq m) – has been fully leased out. According to management, the entire CCL with a combined retail space of 3,150 sq m, or 80 shops, now enjoys a high occupancy rate of more than 90%.

Action & Recommendation

With no major nearterm catalysts in sight, we maintain our HOLD recommendation on SMRT with a target price of $1.82. The share price should be wellsupported by a decent dividend yield of almost 5%.

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