The Leash is Tightening

♦ Results in line with expectations
9M08 operating and net profit increased by 13.2% and 16.2% respectively, accounting for approximately 80% and 82% of our full-year forecasts. Year-todate, the key growth drivers are the MRT, Taxi and Rental segments, while bus operations posted weaker profits.

♦ Rising MRT ridership offsetting higher electricity cost
Electricity cost, the most volatile cost component, increased by $8.4m or 30.2% in 9M08. But this was offset by MRT ridership growth of 6.9% in the same period. As MRT ridership increased over the last 2 years, the operating margin of the MRT segment improved markedly from 25.5% in 9M06 to 29.4% in 9M07 and 30.4% presently.

♦ Forecasting low double-digit growth from FY08-10
On account of the increase in the population, firm economic growth and rising tourist arrivals, we expect SMRT to achieve low double-digit operating profit growth from FY08-10. The MRT, Taxi, Rental and Advertising businesses would be spearheading this growth. Meanwhile, there could be upside surprises from the engineering business’s overseas operating and maintenance contracts.

♦ Margins could decline as rail network expands
Following the transport minister’s announcement of the advancement of the Circle Line’s opening from 2010 to mid-2009, we have tweaked our FY10 forecasts. We have raised our MRT ridership numbers but have lowered our operating margin assumption, to take into account the dilution of passenger load over an expanded rail network. With the rail network to be progressively expanded till 2020, we think that it is only a matter of time before the operating margin declines as trains become less crowded.

♦ Risks has increased for land transport operators
From the recent announcements pertaining to the Land Transport Review, we think that the domestic land transport business has become riskier for the incumbents, as the authorities demand higher service standards and exert greater control over their operations. We think a valuation of 15x FY09 earnings for SMRT fairly reflects this risk. As the stock is supported by a forecasted dividend yield of 5.0% in FY09, we are maintaining our HOLD recommendation.

Watching fuel

• Above expectations. 3QFY08 net profit of S$38.3m (-5.3% yoy) was 20% above our estimate and 8% above consensus on an annualised basis. This was attributable to lower-than-expected expenses. Revenue increase of 7.3% yoy to S$202.1m was within our expectations, driven by higher train and bus ridership, improved hire-out rates for taxis, and better advertising and rental revenue. Core EPS was S$0.025, down 5.3% yoy.

• Expenses well-managed. SMRT’s operating expenses climbed 3.5% yoy to S$153.6m on higher staff-related costs (+6.2% yoy) and energy costs (+10.3%), repair & maintenance (+7.6%) and other expenses (+8.7%) However, there was lower depreciation (-10.1% yoy). Volatile diesel costs remained the bugbear and this is expected to remain unchanged into FY09.

• Operational review. Train and bus operations performed well on higher ridership. The main growth continued to come from rentals and advertising on the back of a robust economy and increased rental space at refurbished MRT stations. Net lettable space rose 5.1% with over 99% occupancy.

• Land transport review. The government’s new strategy for Singapore’s rail system has been revealed but details are scant, especially relating to the introduction of competition. What’s certain is that all new rail licences will be valid for 10-15 years instead of 30 years. The introduction of a through-fare system could marginally shave operators’ revenues although the impact should be neutral in the long term.

• DCF target price unchanged at S$1.82. (9.3% WACC; 2% terminal growth). We are raising our earnings forecasts by 30-43% for FY08-10 as we earlier underestimated ridership and group margins despite rising expenses. However, this has been offset by a higher WACC assumption of 9.3% (vs. 7.5% previously) to reflect a higher cost of equity in a more risk-averse environment. At S$1.82, we believe upside would be limited, given the lack of share-price catalysts in the near term. Maintain Underperform.

SMRT Q3 net profit dips 5.3%

SMRT Corp’s net profit fell 5.3 per cent year-on-year to $38.3 million for the third quarter ended Dec 31, 2007, even as increased ridership, a higher average taxi hired-out fleet and rental/advertising growth pushed group revenue up.

The earnings fall was because the previous corresponding quarter included exceptional items, a key one being the inclusion of a final contribution from expired cards.

Q3 revenue rose 7.3 per cent to $202.1 million with revenue growth from all sectors. SMRT operates Singapore’s biggest rail network, as well as relatively small fleets of buses and taxis.

But its other operating income dropped 69.5 per cent or about $8.5 million to $3.73 million, in the absence of the exceptional items it saw in the previous corresponding quarter.

Excluding those exceptional items, SMRT Corp said the Q3 net profit figure would have been a $5.4 million or 16.4 per cent improvement to $38.3 million.

‘SMRT has delivered another set of good operating results in Q3 FY08 despite the higher operating cost environment,’ said president and CEO Saw Phaik Hwa. ‘We will continue to pursue opportunities to grow our revenue and at the same time manage costs in all aspects of our businesses.’

Operating profit from the group’s MRT operations in Q3 rose 4.8 per cent to $33 million because of ridership growth. Staff costs were higher. Average daily ridership rose 7.8 per cent to 1.3 million from the previous corresponding quarter.

Meanwhile, Q3 operating profit from buses slumped to $15,000 from $4 million in the previous corresponding quarter because of increased diesel and staff costs, although this was partially offset by higher daily ridership.

The taxi business was back in the black in Q3 with operating profit of $500,000, compared with a loss of $600,000 in the corresponding quarter last year, thanks to a higher average hired-out rate of almost 94 per cent – up from 76.5 per cent.

As usual, rental revenue and advertising did well. Third-quarter operating profit from the rental of retail space jumped 23.4 per cent to $8 million with the redevelopment of more commercial space at various MRT stations. Operating profit from advertising on buses, trains and stations also improved 6.9 per cent to $3.6 million.

Earnings per share in Q3 fell from 2.7 cents to 2.5 cents.

For the nine months ended Dec 31, 2007, net profit attributable to equity holders rose 16.6 per cent to $115.8 million, while revenue rose 6.7 per cent to $593.6 million.

As for the Land Transport Review announcements yesterday and a week ago, SMRT says it is upbeat about the new developments to both bus and rail. It said there are more opportunities to operate and maintain a more extensive rail network, and a good opportunity to grow the bus business beyond current territories. SMRT currently runs only 800 of the 3,700 public buses in Singapore and is restricted to the northern part of the island.