3Q09 results in line

3Q net profit of $41.2m was within expectations. Ridership remained firm. The measures announced in the Singapore Budget will benefit SMRT, particularly job credits and cut in corporate tax rate. Maintain Buy, TP: S$1.82.

3Q net profit $41.2m (+8%) within expectations. Headline net profit of S$41.2m (+8% y-o-y) was within expectations. Revenue was up 8.4% y-o-y on higher train and bus ridership, rental and advertising revenue. Total operating expenses was up by 10%, largely on higher diesel and electricity costs (+35%), and higher staff costs (+4%). Electricity costs stood at $18.8m (+68%) due to higher electricity prices and consumption. Diesel costs were marginally higher at $11.4m (+2%), due to higher consumption offset by lower prices. Management indicated that its new electricity contract for the period from 1 Apr – 30 Sep 09 will be about 25% lower than current contract prices.

Savings from Budget 2009. The Group indicated that they are expected to derive costs savings from the measures announced, but was unable to share specific figures. Specifically, they will benefit from the cut in corporate tax rate, job credits and rebates in road taxes. They will be working with the PTC (Public Transport Council) to pass on savings from the Budget to commuters. They have a staff headcount of about 6,000. We estimate a job credit of c. $13m. As of 9M09, staff costs account for c. 31% and 39% of revenue and total operating costs respectively.

Maintain Buy, TP: S$1.82. We maintain our Buy recommendation. We believe ridership will remain stable despite the recession. Our TP is premised on 14x FY10F earnings, its mid-trading range. Its dividend yield of 5% should provide support, based on our assumption of 70% payout ratio.

Riding out the recession

• Within expectations. 3QFY09 net profit of S$42.1m (+7.6% yoy) was within annualised market consensus (S$158m) and our estimate (S$164m). 9M09 net profit of S$124m constitutes 75.6% of our full-year estimate. 3Q revenue growth of 8.4% yoy to S$219m was within expectations, driven by growth in all segments with the exception of taxi operations.

• Operating expenses. Operating expenses rose 9.2% yoy to S$179.5m on higher energy costs (+35.1% yoy) and other expenses (+7.2% yoy). Within energy, diesel costs rose 1.9% yoy to S$11.4m, while electricity costs rose 68.3% yoy to S$18.8m due to higher rates from 1 Oct 08. However, rates should fall 25% from 1 Apr 09 under a recent energy contract signed. Staff costs rose 4.2% yoy on higher headcount, salary adjustments and higher CPF contributions.

• Operational review. Revenue from train and bus operations rose on ridership growth, albeit slower than in previous quarters. Group operating profit margins were steady at 23%, although LRT and bus operations were hit by higher energy costs while taxi operations worsened on lower fleet utilisation. However, contributions from the Middle East (Palm Jumeirah operations) continued to grow rapidly (+150% yoy), boosting engineering service EBIT. Rental growth was buoyed by higher average rental rates (+2.2% qoq), despite unchanged net lettable space of 26,674 sq m with an average 99.1% occupancy rate.

• Exploring lower fares. The corporate tax cut and Jobs Credit scheme will benefit SMRT, while we expect savings from the rebate/waiver of the road tax and diesel tax to be passed back to commuters and taxi hirers. SMRT is in discussions with the Public Transport Council for lower bus and train fares by end-Feb 09.

• Maintain Outperform. We maintain our FY09-11 forecasts as the benefits of recent government budget incentives may not be substantial after SMRT passes on the savings to commuters and taxi hirers. Maintain DCF-derived (WACC 8.5%) target price of S$2.08. SMRT remains attractive for its relative defensiveness in an economic slowdown and dividend yields of over 5%.