Q1FY09 results

Still keeping ahead but just barely
Revenue growth of 11% was driven by MRT and rental income. However, a 36% jump in electricity and diesel costs as well as fuel subsidies to taxi hirers eroded EBIT margin from 23% to 22.3%, leading to only 6% growth in net profit. Train profits were higher YoY but LRT, buses and taxis slipped into the red, mainly due to higher energy costs.

Higher train ridership offset by higher staff & energy costs
Train average daily ridership rose 10.9% during the quarter, boosting operating profit by 9% but gains were eroded by higher staff and electricity costs. Staff costs rose 8% due mainly to headcount of 230 engineers added (another 100 to go) for Circle Line Stage 3 which will be revenue-ready by June 2009, as well as salary adjustments and the 1.5%-point hike in employer’s CPF rate in July 2007.

Energy costs still a big headache
The high cost of diesel is still a big headache for SMRT. If diesel price remains high, buses and taxis in particular will operate at a loss. For taxis, SMRT provides direct subsidies to its taxi hirers to the tune of almost $1m in Q1FY09. It currently does not engage in any hedging as prices are still too volatile.

Saved by rental income
Fortunately, aggressive growth in rental income from commercial spaces at MRT stations (+47% in Q1FY09) as a result of better rental yield and more space following asset enhancement exercises helped to recover some of the gains SMRT gave up to energy and staffing costs. Management expects an incremental $10m rental revenue this year as it is still in the process of upgrading seven more station.

Dividend decent but no catalysts, maintain HOLD
Dividend yield is projected at 4.7% this year, decent but nothing to shout about. While management is hopeful that the PTC will allow a fare increase later this year, it is unlikely to fully cover higher operating costs. Given the lack of catalysts, we maintain our HOLD call.

Let Competitor Lobby For Higher Fare Increase

Cost concerns linger

• Within expectations. 1QFY09 net profit of S$40.3m (+6.2% yoy) was within annualised market consensus and our forecast of S$160m, contributing 25% of our full-year estimate. Revenue growth of 11.2% yoy to S$215.9m was slightly ahead of our expectations, mainly driven by higher train ridership and rental income.

• Higher operating expenses. Operating expenses rose 15.7% yoy to S$135m on higher energy costs (+36.2% yoy) and other expenses (+21.1% yoy). Within energy, diesel costs rose 72.3% yoy to S$15.9m, while electricity costs rose 9.5% yoy to S$13.7m. Despite a bigger headcount in preparation for the opening of the Circle Line Stage 3 in mid-2009, staff costs were relatively contained (+7.8% yoy) while depreciation expenses dipped 0.7% yoy. Management expressed concern about sustained high energy costs, especially diesel, and may take the opportunity to hedge should prices fall in the near and medium term.

• Operational review. Revenue from train and bus operations increased on higher ridership, as high petrol prices and ERP charges forced more private car owners into taking public transport. Operating profit margins improved for all except bus operations, which were hit by higher diesel costs. As a result, bus operations lost S$3.3m at the operating level, vs. a S$0.5m profit a year ago. Growth drivers were mainly trains and rentals. Net lettable space rose 13.8% yoy to 26,264 sq m with an average 99.1% occupancy.

• Outlook. We expect SMRT’s topline to improve further on higher train and bus ridership with increased frequencies as marginal private car owners switch to more affordable public transport. However, energy costs should remain a challenge, despite the prospect of a fare hike in 4QCY08.

• Maintain Underperform. We have adjusted our FY09-10 earnings forecasts by – 1.5% to 1.1% to reflect improved ridership as well as higher energy costs, the cost of increased frequencies for trains and higher capex assumptions, which we had earlier underestimated. As a result, our DCF target price drops from S$1.93 to S$1.81 (unchanged WACC 9.3%; terminal growth 2%). Maintain Underperform.

1Q09 results in line

Comment on Results

SMRT’s 1Q09 earnings were in line with expectations. The Group’s net profit rose by 6.2% yoy to S$40.3m on revenue growth of 11.2% yoy to S$216m. Revenue growth was primarily driven by MRT business (+8.2% to S$116m), due to higher rider-ship, as well as the rental business (+47% to S$13.8m). Higher operating profit at the MRT division (+9% yoy to S$35m) and Rental business (+51% to S$10.3m) helped offset losses at the bus division (from profit of S$0.5m to loss of S$3.3m) and taxi division (higher losses of S$1.3m compared to S$300k in 1Q08), both of which were affected by higher fuel costs.

Recommendation

Looking ahead, we expect the Group’s core MRT business to continue faring well on firm rider-ship growth, which should help to alleviate the weak performance of the bus and taxi businesses. Higher rental income on increased floor space and improved rental yields should also help to contribute to higher earnings for SMRT. Whilst earnings growth in the immediate term could be flattish as the Circle Line is being readied (Circle Line Stage 3 is expected to commence in mid 2009) and rolled-out, we continue to be positive on the long-term prospects of the Group, on higher rider-ship and greater use of trains as a mode of public transport.

Maintain BUY, TP S$2.00