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.

Rough ride over the next year for SMRT

SMRT Corp’s first-quarter results may be setting the stage for the year ahead – one potentially fraught with continuing losses from its Circle Line operations and rising costs putting the squeeze on profit margins.

For its fiscal first quarter ended June 30, SMRT registered a 20.7 per cent fall in net profit to $38.24 million, despite revenue rising 9 per cent to $235.34 million. SMRT has also cautioned that it may not be able to maintain FY2010’s profitability for the current financial year ending March 31, 2011.

SMRT’s shares closed at $2.05 yesterday, having shed 17 cents since July 30, when it closed at $2.22.

Since the debut of the Circle Line, ridership on the new line has risen from a daily average of 124,000 to nearly 145,000, though the break-even target lies at about 200,000.

SMRT expects Circle Line ridership to improve, but the line will continue to operate at a significant loss over the next 12 months, it has said.

As further phases to the line are launched, the Circle Line will rack up additional expenditure in terms of staff and related costs as well as energy expenses, which will mean further cost pressures.

DMG Research pointed out in a report earlier this week that ‘CCL operations could remain a drag on earnings for FY11-12, considering that Stages 4-5 will only be completed in 2H11 (SMRT’s FY12), and may require a period of gestation to provide any possible accretion to SMRT’s bottom line’.

Costs were another bugbear for the transport company during the quarter, as electricity and diesel expenses shot up 29 per cent to $30.2 million, on the back of higher average tariff and electricity consumption as well as higher diesel prices.

Where diesel costs are concerned, a hedging policy – there is no hedge in place at the moment – may have helped the group better manage the volatility in diesel prices.

While the board has approved a hedging policy, its CFO said in a conference call last week that when the policy is implemented will depend on how diesel prices play out.

Where electricity is concerned, SMRT has a one-year fixed-rate contract in place that expires in September. It is currently ‘monitoring electricity prices and will assess (its) options’, an SMRT spokesman said.

According to a Nomura report, a 5 per cent increase in staff costs would translate to a 7-8.5 per cent decline in group Ebit (earnings before interest and taxes), while a 5 per cent rise in electricity and diesel costs was estimated to result in a 2.5-3.5 per cent decline in group Ebit.

Not helping the situation is the early termination of its contract to operate and maintain the Palm Jumeirah Monorail in Dubai, a contract which was to expire in 2015.

While the earlier-than-anticipated termination is not expected to have any material impact on SMRT’s consolidated net tangible assets per share and earnings per share for the current financial year, it is seen as a setback to the group’s efforts to grow its operations outside Singapore.

One bright spot for the group, however, is its retail business, which continues to grow, helping to prop up the bottom line.

Both the advertising and rental businesses – which collectively contributed 38 per cent to Q1 operating profit – are flourishing as the economy continues to improve. The new Circle Line stations as well as refurbished train stations will also mean increased lettable space.

Still, even combined, the $17.6 million in operating profit derived from these two businesses trails behind its train segment, which contributed about 60 per cent to Q1 operating profit with some $27.7 million.

Given this, SMRT will need to keep a stricter eye on its core business and work harder at managing costs, in order to better weather the ‘challenging outlook’ it expects over the next 12 months.

Rough ride over the next year for SMRT

SMRT Corp’s first-quarter results may be setting the stage for the year ahead – one potentially fraught with continuing losses from its Circle Line operations and rising costs putting the squeeze on profit margins.

For its fiscal first quarter ended June 30, SMRT registered a 20.7 per cent fall in net profit to $38.24 million, despite revenue rising 9 per cent to $235.34 million. SMRT has also cautioned that it may not be able to maintain FY2010’s profitability for the current financial year ending March 31, 2011.

SMRT’s shares closed at $2.05 yesterday, having shed 17 cents since July 30, when it closed at $2.22.

Since the debut of the Circle Line, ridership on the new line has risen from a daily average of 124,000 to nearly 145,000, though the break-even target lies at about 200,000.

SMRT expects Circle Line ridership to improve, but the line will continue to operate at a significant loss over the next 12 months, it has said.

As further phases to the line are launched, the Circle Line will rack up additional expenditure in terms of staff and related costs as well as energy expenses, which will mean further cost pressures.

DMG Research pointed out in a report earlier this week that ‘CCL operations could remain a drag on earnings for FY11-12, considering that Stages 4-5 will only be completed in 2H11 (SMRT’s FY12), and may require a period of gestation to provide any possible accretion to SMRT’s bottom line’.

Costs were another bugbear for the transport company during the quarter, as electricity and diesel expenses shot up 29 per cent to $30.2 million, on the back of higher average tariff and electricity consumption as well as higher diesel prices.

Where diesel costs are concerned, a hedging policy – there is no hedge in place at the moment – may have helped the group better manage the volatility in diesel prices.

While the board has approved a hedging policy, its CFO said in a conference call last week that when the policy is implemented will depend on how diesel prices play out.

Where electricity is concerned, SMRT has a one-year fixed-rate contract in place that expires in September. It is currently ‘monitoring electricity prices and will assess (its) options’, an SMRT spokesman said.

According to a Nomura report, a 5 per cent increase in staff costs would translate to a 7-8.5 per cent decline in group Ebit (earnings before interest and taxes), while a 5 per cent rise in electricity and diesel costs was estimated to result in a 2.5-3.5 per cent decline in group Ebit.

Not helping the situation is the early termination of its contract to operate and maintain the Palm Jumeirah Monorail in Dubai, a contract which was to expire in 2015.

While the earlier-than-anticipated termination is not expected to have any material impact on SMRT’s consolidated net tangible assets per share and earnings per share for the current financial year, it is seen as a setback to the group’s efforts to grow its operations outside Singapore.

One bright spot for the group, however, is its retail business, which continues to grow, helping to prop up the bottom line.

Both the advertising and rental businesses – which collectively contributed 38 per cent to Q1 operating profit – are flourishing as the economy continues to improve. The new Circle Line stations as well as refurbished train stations will also mean increased lettable space.

Still, even combined, the $17.6 million in operating profit derived from these two businesses trails behind its train segment, which contributed about 60 per cent to Q1 operating profit with some $27.7 million.

Given this, SMRT will need to keep a stricter eye on its core business and work harder at managing costs, in order to better weather the ‘challenging outlook’ it expects over the next 12 months.

A second round of disappointment

• SMRT Corp Ltd results surprised the market on the downside: in addition to net profit fall of 21% YoY to $38.2mil in 1QFY11, management now guides “the profitability of FY2010 may not be maintained.”

• As we were at the low-end of the full-year forecast range with FY11F EPS at 10.3 cents representing 4% YoY fall, we are comfortable maintaining our estimates. We also maintain our Fair Value at $1.99

and HOLD rating.

• SMRT’s fare business – i.e. train and bus operations which account for 78% of operating revenue

– saw sharply lower operating profit. Operating margins for MRT plunged to 21% from 32% year ago, while bus business went into operating loss of $0.8 mil, compared to $1.2mil in 1QFY10.

• MRT daily ridership growth of 13% YoY to 1,589 in 1QFY11 and 8% YoY to 833 for bus, gives little encouragement against unavoidable cost pressures. While 1QFY11 margins improved from the first round of nasty surprise in 4QFY10, managment guides that “the new Circle Line will continue to operate at a significant loss over the next 12 months.” Circle Line 1,2 and 3, reached daily ridership of 145,000, but this still falls far short of projected 200,000.

• Ramped up requirements for line CCL 1 and 2 since April 2010 opening, and preparation for CCL 4 and 5 (13 stations) opening in FY12, will ensure no let up in cost increases. At the same time, savings from Jobs Credit will cease from July 2010.

• In 1QFY11, staff costs rose 10% YoY due to 3% rise in headcount to 6,600, and made up 39% of total operating costs. At the same time, fuel costs jumped 29% YoY due to higher prices and consumption,

and accounted for 20% of total operating costs.

• After neutralized impact in 1QFY11 from fare cuts implemented on 1 April 2009, average MRT fare fell 1% YoY to 89.7 cents while that for bus fell 2% YoY to 65 cents. The new fare structure from July 2010 will be mildly positive, offsetting much of the end to a 3% temporary cut for April 2009 to June 2010.

• A buoyant economy continued to boost the segments of rental of commercial space and advertising. Combined, revenues rose 13%, and made up 10% of total operating revenues. SMRT’s lettable space expanded 8% YoY to 31,217 sq m with average occupancy rate ar 98.6%.

• Other disappointments: (1) Despite 3% rise in taxi revenue, operating profit dived 41% YoY due to higher repair and maintenance costs as well as increased hirer benefits paid out. (2) Client Nakheel PJSC is terminating its contract with SMRT for the operation and maintenance of Palm Jumeirah.

• Capex projection is now slightly tempered to S$150mil for FY11F, with $30-40mil allocated for taxi operations and about S$50mil for train.

Circle Line weighs heavy on SMRT

SHARES in SMRT Corp slipped 12 cents – or 5.4 per cent – in trading to close at $2.10 yesterday, after SMRT cautioned last week that it may not be able to maintain FY2010’s profitability for the current financial year ending March 31, 2011.

For the next 12 months, profitability is expected to be impacted by higher staff costs, volatility in energy prices and continuing losses for the Circle Line.

A DMG research report said: ‘We believe that Circle Line operations could remain a drag on earnings for FY11-12, considering that Stages 4-5 will only be completed in 2H11 (SMRT’s FY12), and may require a period of gestation to provide any possible accretion to SMRT’s bottom line.’

While ridership on the Circle Line has risen from an average daily ridership of 124,000 to nearly 145,000, the break-even target lies at about 200,000, analysts said.

The group has also recently switched from a transfer rebate system to a distance-based charging one, which may have a negative impact on fare revenue in the next 12 months.

For its fiscal first quarter ended June 30, SMRT registered a 20.7 per cent fall in net profit to $38.24 million, despite revenue rising 9 per cent to $235.34 million.

Analysts were upbeat on its retail business. ‘Advertising will benefit from the upcoming major events (such as Youth Olympic Games and Formula One) while rental will benefit from the addition of rental spaces from refurbished train stations and new Circle Line stations,’ Phillip Securities Research analyst Toh Wei Kiong wrote.

Citi Investment Research maintained a ‘sell’ on the stock, with a target price of $1.90 while Phillip maintained a ‘hold’, downgrading its fair value estimate from $2.36 to $2.18.

DMG called a ‘sell’ on SMRT with a target price of $2 and a ‘buy’ on ComfortDelGro (target price: $1.78), citing Comfort’s 15 x FY10 P/E, versus SMRT’S 20 x FY11 P/E multiple.