FY11 results within Expectations

•Flat profit growth in FY11 within expectations

•Factored in expectations of higher depreciation and energy expenses

•Trimmed profit estimates by 2.8-6.8% for FY12-13E

•Proposed final dividend of 6.75C

•Maintain Buy with revised target price of S$2.22

FY11 results discussion

Despite the 8.3% growth in revenue, SMRT recorded a slight decline in net profit of S$161.1mn for FY11. The main sources of profit margins erosion came from a 6% increase in staff cost and a 17% increase in energy expense. Despite fairly similar average headcounts for both years, staff cost was higher in FY11 as there was lower jobs credit shield as compared to FY10. Energy cost was higher due to increased train runs following the commencement of CCL operations in April 2010 and higher average unit energy cost. Overall, the results were in line with our expectations of S$162.1mn.

Valuation

We used a blended valuation model of DCF (COE: 7.2%, terminal g: 1%) and P/E (18.0X FY12e PATMI) to arrive at our target price of S$2.22. Our reduction in target price from S$2.30 is mainly due to reduced profit estimates after factoring higher energy & depreciation expense in our forecasts. We keep our buy recommendation unchanged and expect a total return of 21.2% after incorporating a dividend yield of 4.5%.

Segmental discussion

MRT, LRT and Bus revenue increased by 6.7-9.6%, despite lower average fares following the implementation of distance based fare system and fare reduction exercise in FY11. This revenue increase was attributable to a 7.5-12.6% increase in ridership on the rail and bus systems. Both the Bus and LRT business continued to record losses, while MRT business recorded a 13% decline in EBIT contributions. Circle line’s (CCL) ridership continued to grow for the quarter to 181k, but is expected to continue making losses. CCL Stages 4 & 5 is scheduled to open in October 2011 and we expect significant increase in rail ridership towards the end of FY12.

Ancillary businesses were the key support to the Group’s profits as both advertising and rental operations recorded a 13% increase in sales. In FY11, ancillary business (rental, advertising & engineering) contributed 45% to the EBIT of the Group.

Forecasts and guidance

The only major surprise during the results briefing would probably be the guidance for S$600mn of CAPEX to be spent in FY12, which is significantly higher than the S$91-139mn/yr of CAPEX over the past 5yrs. This would be spent mainly for 22 trains (c.S$300mn), buy-over of Changi & Dover (c.S$100mn), 50 buses and fleet renewal for taxis. We believe that this would result in a significant increase in depreciation expense for FY12. Based on the cash balance of S$376mn on the books, we also believe that debt issuance is likely in order to maintain a more balanced capital structure. Hence, we factored in an increase of S$300mn in debt into our forecasts.

SMRT also guided for an expected increase in rental revenue of S$7mn for FY12, following the expected opening of Orchard Exchange (2,300sqm) in the second quarter of 2011 and the completion of renovations at several other stations throughout FY12. As rental operations are highly profitable (EBIT margin: c.77%), we believe that this incremental rental revenue would give a substantial boost to the bottom line of the group.

Overall, we do not expect FY12 to record exciting profits as the expected increase in ridership would likely be offset by higher operating expenses. Following the opening of CCL stage 4 & 5 in Oct, we expect profit growth to bottom out in the coming financial year before growing in FY13. After incorporating the new information, we trimmed profit estimates by 2.8-6.8% for FY12-13E.

FY11 results within Expectations

•Flat profit growth in FY11 within expectations

•Factored in expectations of higher depreciation and energy expenses

•Trimmed profit estimates by 2.8-6.8% for FY12-13E

•Proposed final dividend of 6.75C

•Maintain Buy with revised target price of S$2.22

FY11 results discussion

Despite the 8.3% growth in revenue, SMRT recorded a slight decline in net profit of S$161.1mn for FY11. The main sources of profit margins erosion came from a 6% increase in staff cost and a 17% increase in energy expense. Despite fairly similar average headcounts for both years, staff cost was higher in FY11 as there was lower jobs credit shield as compared to FY10. Energy cost was higher due to increased train runs following the commencement of CCL operations in April 2010 and higher average unit energy cost. Overall, the results were in line with our expectations of S$162.1mn.

Valuation

We used a blended valuation model of DCF (COE: 7.2%, terminal g: 1%) and P/E (18.0X FY12e PATMI) to arrive at our target price of S$2.22. Our reduction in target price from S$2.30 is mainly due to reduced profit estimates after factoring higher energy & depreciation expense in our forecasts. We keep our buy recommendation unchanged and expect a total return of 21.2% after incorporating a dividend yield of 4.5%.

Segmental discussion

MRT, LRT and Bus revenue increased by 6.7-9.6%, despite lower average fares following the implementation of distance based fare system and fare reduction exercise in FY11. This revenue increase was attributable to a 7.5-12.6% increase in ridership on the rail and bus systems. Both the Bus and LRT business continued to record losses, while MRT business recorded a 13% decline in EBIT contributions. Circle line’s (CCL) ridership continued to grow for the quarter to 181k, but is expected to continue making losses. CCL Stages 4 & 5 is scheduled to open in October 2011 and we expect significant increase in rail ridership towards the end of FY12.

Ancillary businesses were the key support to the Group’s profits as both advertising and rental operations recorded a 13% increase in sales. In FY11, ancillary business (rental, advertising & engineering) contributed 45% to the EBIT of the Group.

Forecasts and guidance

The only major surprise during the results briefing would probably be the guidance for S$600mn of CAPEX to be spent in FY12, which is significantly higher than the S$91-139mn/yr of CAPEX over the past 5yrs. This would be spent mainly for 22 trains (c.S$300mn), buy-over of Changi & Dover (c.S$100mn), 50 buses and fleet renewal for taxis. We believe that this would result in a significant increase in depreciation expense for FY12. Based on the cash balance of S$376mn on the books, we also believe that debt issuance is likely in order to maintain a more balanced capital structure. Hence, we factored in an increase of S$300mn in debt into our forecasts.

SMRT also guided for an expected increase in rental revenue of S$7mn for FY12, following the expected opening of Orchard Exchange (2,300sqm) in the second quarter of 2011 and the completion of renovations at several other stations throughout FY12. As rental operations are highly profitable (EBIT margin: c.77%), we believe that this incremental rental revenue would give a substantial boost to the bottom line of the group.

Overall, we do not expect FY12 to record exciting profits as the expected increase in ridership would likely be offset by higher operating expenses. Following the opening of CCL stage 4 & 5 in Oct, we expect profit growth to bottom out in the coming financial year before growing in FY13. After incorporating the new information, we trimmed profit estimates by 2.8-6.8% for FY12-13E.

SMRT’s Q4 profit jumps 50% to $34m

For the full year, net profit slips 1.1% to $161.1m

HIGHER operating profit, mainly from improved train and bus ridership, boosted SMRT Corp’s net profit by 50.3 per cent to $34 million for the fourth quarter ended March 31, 2011, although this was partially offset by higher income tax expenses.

Q4 revenue rose 8.6 per cent to $244.5 million from a year ago. Earnings per share rose to 2.2 cents from 1.5 cents previously.

For the full year, the operator of Singapore’s biggest rail network posted a net profit dip of 1.1 per cent to $161.1 million on higher staff and energy costs, as well as other operating expenses. Revenue climbed 8.3 per cent to $969.7 million, mainly on higher train and bus ridership, contribution from the Circle Line, higher taxi rental revenue and higher rental and advertising revenue. These were, however, partially offset by lower average MRT fare and lower revenue from Palm Jumeirah. Earnings per share for the full year slipped to 10.6 cents from 10.7 cents a year ago.

A final dividend of 6.75 cents per share has been proposed, taking the total dividend for FY2011 to 8.5 cents per share, or $129.1 million.

‘SMRT has achieved a commendable set of results despite challenges faced during the year such as losses from the start-up phase of Circle Line stages 1 to 3 and the volatility in energy prices,’ said SMRT president and chief executive officer Saw Phaik Hwa.

Revenue from its core rail business rose 9.6 per cent to $527.1 million for FY2011 due mainly to higher ridership even as this was offset by lower average train fare due to the implementation of distance-based fares. The opening of CCL 1 and 2 also boosted revenue. But full-year operating profit was $16.2 million lower at $113.5 million on lower other operating income, higher energy costs and staff and related expenses.

SMRT also runs a fleet of buses and full-year revenue from the operations increased 6.7 per cent to $213.1 million on higher ridership partially offset by lower average fare. Full-year bus operations incurred a higher operating loss of $3.1 million for FY2011 on higher staff expenses because of lower jobs credit, along with higher diesel cost.

Rental revenue from its taxi fleet grew 4.3 per cent to $74.1 million with improved hired-out rates and a larger average hired-out fleet. Still, taxi operations saw a $2.6 million loss against an operating profit of $1.8 million the year earlier due to higher depreciation, higher insurance cost, and higher repair and maintenance costs.

Both rental revenue from commercial space and advertising revenue rose though. The former grew 13.1 per cent to $73.6 million following the redevelopment of various MRT stations, boosting operating profit by $6.1 million compared with the previous year. The latter was 12.6 per cent higher at $25.4 million on an increase in advertising on trains and in MRT stations, resulting in 14.6 per cent higher operating profit.

Looking ahead, SMRT expects higher revenue mainly due to higher train and bus ridership in the first quarter. Group operating expenses are likely to be higher as staff and related costs rise with higher CPF rates and additional headcount with the ramp-up of CCL 4 and 5, the final two Circle Line stages due to open in October.

GLP to replace SMRT as STI constituent

GLOBAL Logistic Properties (GLP) will replace transport group SMRT Corp as a constituent of the Straits Times Index (STI) on March 21. This follows a half-yearly review of the Singapore market index.

Singapore Press Holdings (SPH), Singapore Exchange (SGX) and FTSE Group, which jointly announced the constituent changes in the STI and FTSE ST Indices, said SMRT Corp will join the FTSE ST Mid-Cap Index.

The STI, a widely followed benchmark, comprises the top 30 SGX mainboard-listed companies by market capitalisation and which pass the relevant investability screens.

GLP, which was listed in October last year, is one of the largest providers of modern logistics facilities in the region. The group owns, manages and leases out a vast network of properties.

The STI reserve list, comprising the top five non-constituents of the index in terms of market capitalisation, are Yangzijiang Shipbuilding Holdings, Keppel Land, Cosco Corp Singapore, CapitaCommercial Trust and Ascendas Real Estate Investment Trust.

Companies in the reserve list will replace any constituent that becomes ineligible as a result of corporate actions before the next review, which is scheduled for Sept 8.

Other constituent changes were also announced yesterday for FTSE ST Indices, such as the FTSE ST Maritime and FTSE ST Catalist. For the FTSE ST China Top Index, Keppel Land, Guocoland, Hi-P International and China Minzhong Food Corp will replace Raffles Education Group, Oceanus Group, China XLX Fertiliser and China Hongxing Sports.

Details of all deletions and additions can be found under the Index Reviews section at www.ftse.com/st.

Circle line losses to taper off soon

Event

• While 3Q11 net profit formed a seemingly large 28% of our full year forecast, higher staff costs in 4Q11 ahead of the opening of Circle Line Stages 4&5 in 2011. Also, 4Q profit is expected to be hurt by higher scheduled train repair & maintenance costs. Having said that, Circle Line ridership is creeping closer to the 200k breakeven level. Also, although 4Q staff costs will rise, there is a buffer from lower staff costs seen since 2Q11 following Palm Jumeirah’s demobilisation. We are raising our target price to $1.97 as we roll forward target valuation to FY12. We rate the stock a HOLD.

Our View

• 3Q11 net profit rose 10% YoY to $43m or 4% if 3Q10 is adjusted for Jobs Credit subsidies and a $6.6m provision for goodwill impairment. Operating profit rose 6% YoY as higher rental and advertising income made up for lower Train profit, losses by LRT and Bus and lower contribution from Taxi.

• Higher oil prices resulted in higher cost of electricity and diesel. Energy costs rose 14% YoY to $31m while “other” costs, mainly diesel sold to taxi hirers, rose 19% YoY from 3Q10 (base adjusted for train goodwill). SMRT is currently unhedged for diesel and electricity as management wants to wait for clearer trends after the winter.

• SMRT will hire another 150‐200 staff from 4Q11 for the opening of Circle Line Stages 4&5 sometime in 2011. This will lead to higher staff costs in 4Q11 and 1Q12, depending on the speed of the hiring exercise. However, ridership of 163k has improved from 154k in 2Q11, and is creeping up toward the 200k needed to break even. At this rate, losses should continue to reduce every quarter.

Action & Recommendation

We roll forward our target valuation to 17x FY12 EPS, thus raising our target price to $2.20. We rate the stock a HOLD. Prefer ComfortDelgro.