Picking Up Speed

♦ Higher ridership propelling growth
SMRT delivered a strong set of operating results: revenue and operating profit grew 7.8% and 27.6% yoy respectively. Net profit increased 38.8% yoy, bolstered by lower finance costs and higher interest and investment earnings. All business segments posted higher operating profits led by the MRT segment. The MRT, LRT and Bus segments experienced higher ridership. Growth was, however, greatest in the MRT segment, with ridership up 6.9% yoy. We are thus raising our full-year growth forecast for MRT ridership from 3% to 6.9% and our FY08F net profit estimate from $134.6m to $141.7m.

♦ Strong economy bodes well for ridership, rental and advertising
SMRT attributed the increase in ridership to Singapore’s strong economic growth. Assuming Singapore’s economy will sustain its growth momentum, we expect the growth momentum of ridership to continue into FY10. Rental and advertising segments are also benefiting from the strong economy and would provide additional growth to SMRT. We forecast operating profit (a better representation of core earnings) – led by the MRT segment – to grow at an annual average rate of 14% from FY08–10. We maintain our view that SMRT presents a steady if unexciting long-term growth story as Singapore’s population grows progressively to 6.5m, as well as the introduction of new MRT lines.

♦ Improvements in lagging segments
The Taxi segment improved significantly as operating loss narrowed to $0.3m in 1QFY08 from $3.2m in 1QFY07. Higher ridership also reduced losses in the LRT segment. While we foresee the LRT segment to turn around this year on higher ridership, we remain cautious about the growth of the Taxi segment’s ridership given Singapore’s competitive taxi industry. Though the performance of the Taxi and LRT segments have improved, we do not expect them to contribute meaningfully to overall operating profit.

♦ Share price has been trending down
SMRT’s share price has been trending downwards from $1.92 on 16 July to $1.76 on 27 July. We think that this could be because investors were being more cautious in a generally volatile market and were consequently more skeptical about the “transport sector restructuring” story. We arrived at our target price of $1.48 from blending these two valuation approaches: 1) implied FY08 yield of 5.5%; and 2) 17x FY08 PER. Reiterate SELL.

Smooth operator

Comment on Results
1Q08 results were above expectations, with net earnings up by 39% yoy to S$38m, on top line growth of 7.8% yoy to S$194m. Revenue growth was broad-based, led by 9.1% yoy top line growth in train operations, as well as higher contributions from taxi (+11.4%), Rental (+18.4%) and Advertising (+44%). The better than expected performance came from much improved taxi operations, which saw losses narrow from S$3.2m a year ago to less than S$300k in this quarter.

Outlook
Other than absorbing a GST rate hike of 2 percentage points beginning from 1 July, we believe that the operating environment for SMRT is largely benign. Train rider-ship growth remains firm whilst the Group’s rental and advertising business is also benefiting from buoyant ad spend, underpinned by a firm economy. The taxi business is also showing signs of recovery,which we believe is critical to helping the Group perform better than we expect. Another good showing in Q2 would convince us that the taxi business can be profitable for the Group once again.

Recommendation
Currently trading at over 20x earnings, and offering a net yield of c. 4%, we believe that valuations for SMRT are fair. We maintain our HOLD recommendation and target price of S$1.67, which is based on a target net yield of 4.5% for FY09. Given this strong set of 1Q08 results though, there may be potential for an earnings and target price upgrade if SMRT can continue do execute well

1QFY08 : Earnings expansion driven by ridership growth

SMRT reported 1QFY08 net profit of S$37.9m, up 38.5% yoy. Revenue was up
7.8% yoy.

Revenue was up 7.8% yoy to S$194.2m. The S$14m yoy rise in revenue was primarily driven by MRT operations, which recorded a S$8.9m or 9.1% revenue rise to S$106.8m – MRT average daily ridership was up 6.9% yoy to 1.23m. Rental revenue from commercial spaces rose a sharp 18.4% yoy as a result of better yield following the redevelopment of retail space at various MRT stations. Advertising revenue surged 43.8% yoy due to increased advertising on trains, stations and buses. Taxi operations also recorded a respectable 11.4% yoy revenue increase.

Operating profit rose 27.6% or S$9.7m yoy to S$44.6m. This was due to a)
MRT operations operating profit rising S$3.7m (or 13%) yoy; b) taxi operating losses falling from S$3.2m in 1QFY07 to S$0.3m; and c) improvements in rental and advertising operating profit.

Positive outlook for revenue going ahead. SMRT expects a yoy ridership increase going forward. The consequent higher fare revenue will be partly negated by the 2 ppt increase in GST effective 1 Jul 07. Revenue from taxi is also expected to rise due to a larger average hired-out fleet. SMRT management expects to record S$8m retail space rental revenue increase for FY08. However, expenses are expected to be higher due to more scheduled repairs and maintenance and increase in employers’ CPF contribution by 1.5 ppt effective 1 Jul 07.

Earnings forecasts raised marginally. We have raised our FY08 net profit forecast by 11% to S$131.1m, to reflect the anticipated stronger FY08 ridership figures for MRT, LRT and buses.

Our target price for SMRT is S$2.10. This comprises the following: a) S$1.55 for existing operations (which has factored in cannibalisation from the 2010 commencement of Circle Line operation), b) S$0.17 for the Circle Line, and c) S$0.38 value enhancement assuming the land transport review will lead to one operator running all rail and bus operations in Singapore. If the land transport review leads to a model of one-rail operator and one-bus operator, then S$1.91
would be a fairer value. While the market continues to speculate on the recommendations of the land transport review, we believe the bullish sentiment could bring SMRT’s share price closer to our more optimistic valuation.

SMRT Q1 profit rises 38.5% to $37.94m

LOWER costs and higher revenue from its trains and buses helped boost SMRT Corp’s net profit for the first quarter ended June 30 by 38.5 per cent to $37.94 million compared to the same period last year.

SMRT, which runs Singapore’s biggest rail network, said Q1 revenue rose 7.8 per cent to $194.19 million mainly because of an increase in passenger numbers on the trains and buses, a better hired-out rate for its taxi fleet, and higher turnover from advertising and rental.

Cost increases were much lower than the growth in revenue, as staff costs were less than expected, and repairs and maintenance for trains were delayed. But total operating expenses still rose $2.1 million or 1.4 per cent to $153.3 million due to higher energy costs and other operating expenses.

Higher electricity costs for trains were offset by stronger MRT revenue, which grew $8.9 million, or 9.1 per cent, to $106.8 million. This was thanks to average daily passenger numbers rising 6.9 per cent to 1.2 million and, to a smaller extent, the fare increase from Oct 1, 2006. Operating profit grew 13 per cent to $32.0 million.

Electricity and diesel costs rose by $3.6 million, or 19.7 per cent, to $21.8 million.

Bus revenue inched up 3.3 per cent to $48.3 million, resulting in an operating profit of $500,000 compared with a loss of $500,000 in the same quarter last year.

Taxi revenue improved by 11.4 per cent to $17.9 million and the operating loss narrowed to $300,000 compared with a loss of $3.2 million in the corresponding quarter.

Staff and related costs were down $2.2 million or 3.4 per cent to $62.4 million mainly because of the deconsolidation of Transit Link’s staff cost.

Earnings per share rose to 2.5 cents from 1.8 cents in the same quarter last year. The group’s net tangible asset per share was 42 cents, up from 39.6 cents three months earlier.

SMRT said it expects Q2 operating expenses to be higher than the same period last year because of more scheduled repairs and maintenance and the rise in employers’ CPF contribution by 1.5 percentage points from July 1. Electricity costs are also expected to go up and diesel prices likely to remain volatile.