SMRT – Kim Eng

Higher‐than‐expected costs take away the shine

Event

SMRT’s full‐year results were below expectations due to a sharper‐than‐expected spike in operating costs in 4Q10, mainly in the areas of bus and train repair and maintenance (R&M) and energy costs. However, rental income exceeded expectations as more commercial space was added in MRT stations. SMRT also raised its final dividend to $0.0675 per share, above our expectation of $0.06 per share.

Our View

The main reasons behind the lower‐than‐expected results were a sharp jump in both R&M and energy costs. There was also an unexpected $3.3m provision for doubtful debt in the engineering division and higher provision for taxi insurance.

However, revenue was slightly above our forecast due mainly to higher MRT revenue and rental income. For the full year, train ridership grew by 5%, propelled by higher ridership on the North‐South and East‐West lines, as well as contribution from Circle Line Stage 3.

We have cut our FY11 forecast by 10% as we now expect R&M cost, energy cost and depreciation charges to be higher than previously expected and may stay high for the next few quarters. SMRT’s fleet of buses and trains is ageing, hence the higher R&M cost while more renovated stations will lead to higher depreciation charges.

Action & Recommendation

We downgrade SMRT to SELL. At 20x our revised FY11 forecast and relative to its peak historical valuation of 21x, the stock is now fully valued. With the strong run‐up in the past few months (up from $2.13 since our last call), outperformance is unlikely for a couple of quarters until the jump in operating costs tapers off and the expected rise in ridership translates to a better bottom line.