No surprises

At a Glance

• 3Q11 net profit of S$43m (+10% yoy; -6% qoq) within expectations

• Circle Line ridership at c.163k/day, still below 200k/day for breakeven

• Expect 4Q11F net profit to slide q-o-q on higher staff and maintenance costs

• Maintain Hold and S$2.15 TP

Comment on Results

3Q11 within expectations. 3Q11 net profit rose 9.6% yoy to S$43m, largely due to the absence of S$6.6m goodwill impairment in 3Q10. Excluding the goodwill charge in 3Q10, EBIT would have been down 6.7% to S$52.1m due to higher energy, maintenance and staff costs. Revenue rose by 8.5% to S$243.9m on higher rail ridership revenue (+9%), advertising revenue (+14%), and rental income (+12%).

Circle Line still dragging rail performance, but this is not a surprise. SMRT will soon start recruiting for Circle Line Stages 4 &5 in preparation for its opening by 4Q2011. Daily ridership for CCL is at c.163k, still below the 200k originally expected. With CCL Stages 4 & 5 due to open by 4Q2011, this should be positive for total ridership and SMRT over the longer term.

Recommendation

Weak FY11F priced in; Maintain Hold and S$2.15 TP. We expect 4Q’s net profit to decline q-o-q largely on higher staff and maintenance costs. On a y-o-y basis, we could see an improvement due to a low base in 4Q10. In our view, the operating losses from Circle Line have been factored into the share price. As stated in our last report, SMRT will benefit given the positive industry developments slated for the latter part of 2011 onwards, such as the completion Jurong East Modification Project and CCL4&5 opening. We maintain our Hold recommendation and TP of S$2.15 based on PE/DCF.

Better connectivity with Tuas West Extension

Tuas West Extension a positive for SMRT… Transport Minister Mr Raymond Lim shed more light on details of the Tuas West Extension on Wed. The new MRT line, which is 7.5km long and consists of four aboveground stations, will extend the existing East-West Line from Joo Koon into Tuas West. We understand that the rail project is projected to cost S$3.5b and will encompass the costs of the new stations, 13 new trains, a 26ha depot and a road viaduct running along the MRT line. When operational in 2016, the extension is expected to serve 100k passengers daily. We see SMRT as the main beneficiary of this development, as it is poised to capture more ridership from this significantly improved connectivity.

…although near-term pressures still exist. In the near term, however, we maintain our view that SMRT is likely to face challenging business conditions due to continuing losses from the Circle Line (CCL) and inflationary cost pressures. In the same announcement, the Transport Minister also updated that the rest of the CCL (Stage 4-5) is expected to open in 4Q11, while the CCL Extension from Promenade to Marina Bay Station is likely to be ready in 2012. As management has previously guided that the CCL network is not expected to breakeven until the line becomes fully operational, this supports our view that the CCL will continue to be the main drag on its bottomline in the coming months. Moreover, the higher operating costs associated with the ramp up of the CCL operations may be aggravated by an overall increase in energy costs. According to US Energy Information Administration (EIA) and Energy Market Company (EMC), both the recent wholesale electricity prices as well as the 2011 WTI crude oil price forecast are showing a positive trend. This suggests that SMRT may face further pressures on its operating costs.

Maintain HOLD and S$2.16 fair value. In view of the above reasons, we are keeping our cautious view on SMRT, notwithstanding the positive long-term growth prospects in the public land transport sector. We also maintain our FY11-12 forecasts and DDM-based fair value of S$2.16 pending the release of its 3QFY11 results on 28 Jan 2011. At current price level, upside potential appears limited (although the impending outcome of Downtown Line operator tender may influence its share price). Maintain HOLD on SMRT based on valuation grounds.

Growth dampened by higher costs

At a Glance

• 2Q11 net profit of S$45.8m (-13% yoy) in line

• Higher ridership and commercial revenue offset by higher electricity, maintenance and staff costs

• Maintain Fully Valued, TP: S$1.88

Comment on Results

2Q11 in line with expectations. 2Q11 net profit was down 13% yoy to S$45.8m, largely due to higher energy, maintenance and staff costs. Revenue rose 7.2% yoy to S$246m on higher rail ridership revenue (+13% yoy), advertising revenue (+24% yoy), and rental income (+16% yoy). The results were in line with our expectations and on track to meet our full year forecasts.

Higher ridership plagued by lower average fares and low ridership on CCL. Although rail ridership improved on higher train frequency and Circle Line (CCL) stages 1 & 2, average fares declined c.1% as a result of distance-based fares from 3 July 2010. Circle Line continues to underperform as ridership base was 154,000, below the 200,000 target.

Operating income dampened by higher maintenance, staff and energy costs. Energy costs remained high (+24% yoy) from higher consumption, tariffs and diesel price. Staff costs increased (+7% yoy) as jobs credit scheme ended in June 2010. More maintenance works on trains and on ageing taxi fleet increased maintenance expenses (+11% yoy).

Recommendation

Maintain Fully Valued, TP S$1.88. We do not expect any positive revision to earnings as CCL continues to be loss making. Furthermore, operating costs are expected to remain high. However, we expect revenue and ridership to continue to grow on higher train frequencies and CCL ridership. We maintain our earnings forecasts and TP of S$1.88 based on average of 15x FY10F/11F PE and DCF (WACC 7.2%, 1%). Maintain Fully Valued.

SMRT’s Q2 profit down 13.3% to $45.8m

HIGHER operating expenses and lower average fares caused SMRT Corp’s net profit to fall 13.3 per cent to $45.8 million in the second quarter ended Sept 30, 2010.

But group revenue was 7.2 per cent higher at $246.0 million, thanks to strong growth in train and bus ridership and higher rental and advertising revenue.

Singapore’s biggest rail operator said revenue also benefited from the contribution from Circle Line Stages 1 and 2, though this was partly offset by lower revenue from the Palm Jumeirah Monorail project in Dubai.

Revenue from the rail business jumped 7.8 per cent to $133 million. SMRT also runs a fleet of buses and taxis. Revenue from buses rose 7.2 per cent to $54.7 million on higher ridership, while taxi revenue increased 4.5 per cent to $18.7 million on a larger hired fleet.

But average MRT fares fell about one per cent after distance-based fares were introduced on July 3.

At the same time, total operating expenses in Q2 rose 10.9 per cent to $193.8 million, mainly on higher staff, repair and maintenance (R&M) and energy costs.

Staff costs rose 9.6 per cent to $77.8 million after the Jobs Credit scheme ended on June 10.

The opening of the Circle Line also ate into SMRT’s bottom line because despite average daily ridership increasing to 154,000, it is still below the projected ridership of 200,000.

‘Though Circle Line ridership has increased, the losses of Circle Line continue to impact the group results,’ said SMRT president and CEO Saw Phaik Hwa.

Basic earnings per share for Q2 dropped 13.3 per cent to three cents from 3.5 cents.

For the first half, SMRT posted net profit of $84 million, or 16.8 per cent lower than the same period a year ago. H1 revenue was $481.4 million, or an 8.1 per cent rise. H1 basic earnings per share fell 16.9 per cent to 5.5 cents, from 6.7 cents.

An interim ordinary dividend of 1.75 cents per share has been declared, equivalent to a dividend of $26.6 million.

SMRT shares closed unchanged at $2.05 yesterday.