Boost from lower fuel costs

• Above expectations. 1QFY10 net profit of S$48.2m (+19.6% yoy) was above our and market consensus of S$40m. This was attributed to lower fuel costs, lower average staff costs from the jobs credit scheme and lower other opex, despite flat revenue of S$215.8m. The flat revenue was due mainly to fare rebates and lower taxi rental income from a reduced fleet size. No dividend was declared.

• Operating expenses. Operating expenses fell 1.3% yoy to S$171m on lower energy costs (-21% yoy) and other expenses (-4.7% yoy). Within energy, diesel costs fell 53% yoy to S$7.5m, while electricity costs rose 16% yoy to S$16m due to higher consumption, despite 25% lower rates from 1 Apr 09 under the latest energy contract. Staff cost rose 3.3% yoy on higher headcount (currently 6,474 staff, +13% yoy) for the opening of the Circle Line, salaries and CPF contributions.

• Operational review. Revenue from all transport-related segments fell; train and bus revenues fell on fare rebates despite posting ridership growth of 3% yoy and 0.05% respectively. Average fares per trip fell between 2-4%. However, group PAT margins improved to 22.3% from 18.7% a year ago, thanks to good cost management. LRT, bus and taxi operations all turned profitable, albeit just marginally. Rental growth (+12% yoy) was buoyed by increased 7% yoy of rental space while rental rates were steady.

• Challenging outlook. Train and bus revenues are expected to be lower on lower fares and higher transfer rebates. Advertising is also expected to slow down in tandem with the slower economy. Outlook for taxis has improved after trimming the fleet by 12% yoy. Overall operating costs should rise with the opening of the Circle Line, repair and maintenance and higher electricity expenses.

• Maintain Neutral. Despite the outperformance, we believe the remaining quarters will be challenging. We fine-tune our FY10-12 forecasts by -0.3 to 1.4%. We maintain our WACC of 9.6%, which translates to a slightly lower DCF-derived target price of S$1.76 (previously S$1.77), supported by a dividend yield of about 4.5%.

1st Quarter FY2010 Results

Flat year-on-year revenue. The Group announced 1QFY10 revenue of $215.8 million, a decrease of $0.1 million compared to the same period last year showing signs that the fare reduction package has affected revenue streams from its train and bus segments. The Group also attributes the flat revenue to a smaller average hiredout fleet for taxis. Net profit showed a rise of 19.6% from $40.6 million in 1QFY09 to $48.2 million 1QFY10. There was an approximately $7.5 million rise in other operating income to $13.1 million, which seems like a one-off and when stripped, bottomline figures are flattish as well.

The MRT segment saw revenue at $115.6 million, a decrease of $0.03 million from 1QFY09. The growth in average daily ridership did partially offset the lower average fare for 1QFY10. Operating profit for MRT did increase by 8.0% to $36.7 million due mainly to higher operating income that was partially offset by higher repairs and maintenance as well as electricity costs. LRT revenue fell marginally to $2.2 million with an operating profit of $0.04 million.

Bus operations revenue for 1QFY10 fell 3.7% to $49.9 million due to lower average fares coupled with lower average daily ridership. It did however post an operating profit of $1.2 million due mainly to lower diesel cost, which is offset against lower revenue and higher repairs and maintenance expenses.

Taxi operations, due to a smaller average hired-out fleet, saw a decline in revenue by $1.2 million or 6.6% to $17.7 million in 1QFY10 compared to $18.9 million in the same period last year. A smaller average holding fleet allowed them to book an operating profit of $1.1 million due to lower other operating expenses.

Rental segment saw a rise in revenue by $1.6 million or 11.9% to $15.5 million compared to $13.8 million in 1QFY09. Operating profit increased by $1.4 million or 12.9% to $12.5 million. Increase in revenue and operating profit for the rental segment is mainly due to a better yield as well as increased rental space following the redevelopment of commercial spaces at various MRT stations.

Advertising revenue fell by $0.3 milion or 4.5% to $5.4 million attributable to the weak economic backdrop. Operating profit thus fell by $0.4 million to $3.5 million.

Engineering and Other Services saw higher revenues of $10.6 million, which is $1.7 million above 1QFY09’s revenue. The increase was attributable to increased consultancy revenue and higher fees from overseas projects. Operating profit was however $0.6 million lower due mainly to lower taxi accident repairs.

Downgrade to HOLD with an adjusted fair value estimate of $1.89. It is evident that the fare reduction package introduced in April this year, which will last for the next 15 months from the 1st of April, has shown signs that it has taken its toll on SMRT’s train and bus revenues despite rising average daily ridership for the train segment. SMRT is expected to be facing headwinds in the coming periods due to the fare reduction package affecting train and bus revenue segments as well as the uncertain economic backdrop already affecting taxi operations and advertising revenues. We have adjusted some of our operating expenses as well as revenue segments to arrive at a slightly lower fair value estimate of S$1.89 (previously S$1.92). As this represents only an upside potential of 9.88% from the last traded price of $1.72, we are downgrading SMRT to a HOLD call with a fair value estimate of S$1.89.

Gateway to paradise

1QFY10 results in-line with expectations. 1QFY10 registered net profit of SGD48.2m, up 19.6% YoY (+24.7% QoQ), or 28.7% of our full year forecast of S$168.1m. The variance was due to the lower-than-expected increase in staff costs which rose 3.3% compared to our forecast of 10.4% as well as unexpected income gains from maintenance projects which amounted to S$7.5m. Operating profit rose 19.9% boosted by MRT (+8%), bus (+136%) and retail rental (+13%). We upgrade SMRT to BUY with a revised target price of S$2.00 from NEUTRAL (S$1.65 previously) as we expect the twin opening of the Integrated Resorts as well as the government’s broader initiatives to encourage public transport usage, to materially improve SMRT’s ridership prospects, hence justifying our stronger terminal growth assumption of 2.5% (2.1% previously).

Rolling along with the high rollers. Between Jan-May, SMRT’s daily rail ridership rose a mere 3.6% YoY to 1.39m, dragged by the recessionary environment. We are, however, upbeat that ridership figures could be stronger next year on the back of stronger economic and tourism growth. The Circle Line will be fully operational in 2010, which will be the gateway to the two Integrated Resorts. We forecast rail ridership growth of 4% in FY10 and a stronger 10% in FY11, in anticipation of positive spin offs from these resorts which will radiate tourists and locals alike towards these locations.

Play the defensive game – Upgrade to BUY. The recent market surge has brought the STI to 3% below our 2,750 target, leaving little upside returns. We view SMRT as an ideal switch play for investors with a defensive mandate. SMRT has a low beta of 0.45x and strong earnings resilience underpinned by positive growth prospects. Since March, SMRT’s stock price has risen by a mere 8% vis-à-vis the STI’s 83%. In terms of dividends, we believe management will continue to reward investors with at least 70% payout. Its strong free cash-flows of S$113m in FY10 and S$127m in FY11 will support future dividend payments. SMRT currently trades at 15.8x FY10 P/E multiple which is at the lower range of its 15-20x trading band. At our target price of S$2.00, SMRT will trade at an FY10 P/E multiple of 18x.