SMRT – OCBC

MARKET INACTIVITY AHEAD OF FY12 RESULTS

FY12 results likely to remain weak

But weakness has already been priced in

Attractive entry point for dividend play remains

Mass selling did not materialize

Following our last report on SMRT after its 3Q12 results, market activity on the counter has been somewhat muted. Strong selling pressure as anticipated by more than half of the street failed to materialize with the counter trading tightly range-bound for slightly more than two months. During this period, SMRT has also kept to a lower profile with the announcement of work completion from its Internal Investigation Team as the only major development.

Preview of FY12 results

Ahead of the upcoming earnings release at the end of the month, we continue to stress that SMRT is likely to see an upswing in fuel costs following the run-up in prices as well as the additional train runs commissioned in the face of higher ridership and public pressure. Coupled with higher staff costs related to seasonal merit increments and additional headcount to meet service requirements, we are likely to see the weakest quarterly performance for FY12. In terms of fall-out from the Dec 2011 service disruptions, we do not expect any incremental costs at thus juncture as the more important COI inquiry has yet to be completed.

Margin pressures but dividend play remains

While SMRT’s FY12 results are likely to stay uninspiring, the counter’s attractiveness as a dividend play remains its key selling point, which SMRT’s management has maintained and reiterated its commitment to maintain its dividend payout policy. Although its prospects going forward will be challenging – COI findings, no fare increments, SMRT’s “customer “base is still growing. Ridership levels continue to grow especially with support from the current trend in COE prices while rental and advertising yields are naturally competitive given the high foot traffic locations of their stations. With this backdrop and earnings support and stabilization in SMRT’s price, we continue to call for an attractive entry point for SMRT. Maintain BUY at an unchanged fair value estimate of S$2.04.

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