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.

Rideship update

•Rail ridership grew 13.4% y-y in August (YTD: 11.8%)

•Bus ridership grew 6.8% y-y in August (YTD: 5.8%)

•Operating costs likely to be a drag on 2Q11 results

•Forecasting revenue to come in at S$247m and net profit of S$43.7m

•Maintain Hold recommendation with a fair value of S$2.18 (unchanged)

Rail ridership grew 13.4% y-y while bus ridership grew 6.8% in August

Rail ridership for Aug’10 grew 13.4% y-y with full contribution from the circle line, while rail ridership for the first 8 months grew 11.8% y-y (forecast: 10% growth). Bus ridership for August grew 6.8% y-y (YTD: 5.8%). We are seeing double-digit growth rate in the rail sector for 5 consecutive months as COEs prices remained high and a low unemployment rate likely contributed to the strong growth. Average fares are likely to trend higher after the implementation of distance based fares.

Results preview for 2Q11

We are expecting revenue for 2Q11 to come in at S$247.3m with net profit of S$43.7m on the back of higher riderships and mega events during the quarter which is likely to contribute strongly to the advertising revenue. Operating costs continue to be a drag on earnings due to higher maintenance costs while electricity cost is likely to fall slightly as average prices for the Jul-Sept’10 fell to US$78/ barrel from US$83/ barrel a quarter ago. SMRT will be releasing their 2Q11 results next Friday (29th October 2010) after the market closes.

Maintain Hold with a fair value of S$2.18 ( unchanged)

We are maintaining our Hold recommendation on SMRT as the current price of S$2.05 represent little upside to our fair value of S$2.18. Transport operators like SMRT are unlikely to do well during inflationary times as they unable to increase prices of fare to match the increase in costs due to regulatory requirements. SMRT is currently trading at about 18.5XFY11E while our target price of S$2.18 represents a forward P/E of 19.6X (FY11 estimated earnings). We are advising investors to switch to Comfort Delgro 14.7X FY10 estimated earnings) for exposure to land transport sector.

Muted outlook

• Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.

• Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.

• Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.

Muted outlook

• Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.

• Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.

• Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.

Unfortunate Punching Bag

• The Edge‘s timely “defense” of Saw Phaik Hwa (SMRT’s CEO) in its latest issue noted the following:

– The fare-setting Public Transport Council (PTC) has no representation from either SMRT or Comfort Delgro, which owns 75.25% of SBS Transit. Members come from the LTA, academia, labor unions, grassroots organizations, professional bodies and businesses.

– Fare hikes / adjustments are determined by a formula that takes into account inflation, national average earnings, less productivity gains.

– Operators may apply for fare hikes / adjustments once a year. (Between 2000 and 2007, there were 5 fare increases of a few cents each time. In 2008, a nominal 0.7% increase was granted, less than the 3% cap provided for; and in 2009, fares were actually reduced by 4.6% as the operators passed on savings from the 2009 Budget.)

– The recently implemented distance-fare scheme was an initiative of the LTA.

– The rail infrastructure was built and designed by the Land Transport Authority. The number of carriages, ie capacity of trains, would have been designed by LTA.

– The Downtown Line, due for completion from 2015, is “still” up for grabs. (*Yet, ask 100 train commuters, and 99 are likely to think SMRT is the sole operator of all MRT lines; North South, East West, North East and Circle Lines.)

– SMRT shares have returned 18.3% per annum since 2000.

• We have long maintained that the perennial question the authorities have to deal with is, is public transport a public service (offering subsidies is then entirely the government’s prerogative; fare hike may not be granted even if provided for by the formula) and then act accordingly: privatize SMRT and SBS Transit.

• The Edge noted that there are currently 10 “Hold” and 8 “Sell” recommendations by broking houses, with no one calling a “BUY”.

• We have however been calling a BUY, and are happy to keep it that way. Assuming 8.75 cents per share dividend for ye Mar’11, yield is a reasonably attractive 4.3%.

*All, except for North Ease Line operated by SMRT.