More MRT retail areas coming

SMRT shares plans for Orchard, Circle Line at launch of Esplanade Xchange

SMRT is carving out a new shopping area at Orchard MRT station – and plans more such spaces at upcoming stations on the Circle Line.

The transport group shared the plans at the launch yesterday of Esplanade Xchange – a 2,000 sq m retail enclave at the Esplanade MRT station.

Teo Chew Hoon, vice-president of SMRT’s commercial and taxi divisions, said that Orchard Xchange could be ready at the end of the year and will have a lettable area of around 1,500 sq m. The tender process for space has started and the group expects good take-up.

There are also plans for ‘a few’ Xchanges at MRT stations in Stages 4 and 5 of the Circle Line, Ms Teo said, without elaborating on where they might be. These stages of the line will run through such places as Botanic Gardens and Holland Village.

SMRT now has seven Xchanges. Esplanade Xchange is the third largest, after Raffles Xchange (about 2,400 sq m) and Tanjong Pagar Xchange (about 2,000 sq m). The group has about 29,000 sq m of retail space across the SMRT network.

Esplanade Xchange is fully let and there will be 26 shops. Tenants include the Infocomm Development Authority of Singapore’s iExperience centre, Coffee & Toast, Dunkin Donuts and IT gadget retailer Juzz1. More than 90 per cent of the outlets have opened and all will be operating by the middle of this month.

Rents at Esplanade Xchange are at ‘market rates’, Ms Teo said, declining to elaborate further. At the nearby Suntec City Mall, the committed average passing rent was $10.89 per sq ft per month in March, according to Suntec Real Estate Investment Trust’s first-quarter financial results.

Ms Teo said that Esplanade Xchange’s location is a strong selling point. It is near Suntec City, Marina Square, CityLink Mall and Bras Basah, and will be directly linked to Raffles City Shopping Centre around the middle of the month. She expects pedestrian traffic to grow after the Circle Line is completed.

Juzz1 general manager Warren Teh said that the store has about 600 walk-in customers a day, and he expects the number to grow after the link to Raffles City opens.

SMRT shares closed unchanged yesterday at $2.32.

Time to board the train

Sell-down likely overdone. SMRT’s share price immediately slumped by 5.7% the next trading day following its 4QFY10 results, as a hike in its operating expenses (opex) had caused the bottomline to miss market’s expectations. We reckon that the market, which may have been overly optimistic previously, is now concerned that the ramp up of the Circle Line (CCL) may damp its profitability going forward, if its 4Q opex is used as a new baseline to estimate the incremental costs. However, our analysis of its historical quarterly opex shows that the 4Q results may possibly include an element of seasonality. Specifically, we observe that opex as a percentage of revenue is traditionally higher in 4Q, due possibly to year-end maintenance or staff bonuses, etc. Therefore, while we acknowledge that its 4Q results, to a certain extent, were impacted by operating costs from CCL, we believe that its most recent 4Q opex may not be the best reference point for its expected costs and that the sell-down due to this issue may be been overdone.

Healthy operating statistics. Operationally, we are still keenly positive on its developments of its core business segments. Monthly statistics provided by SMRT showed that the total monthly MRT ridership had jumped by 12.0% YoY (-2.2% MoM) in Apr, as opposed to 2.3% YoY growth (-4.4% MoM) in Apr 2009. Its monthly bus ridership similarly clocked a robust YoY growth of 6.3% (+13.8% MoM) in Mar, indicating healthy growth momentum in its bus operations. While management does not disclose the monthly progress on its rental space, we are optimistic that the group will be able to achieve a S$6m increase (+9.2%) in rental revenue for FY11 (as guided by management), considering the addition of rental space and encouraging take-up rates at Esplanade Exchange.

Upgrade to BUY. In the longer term, we continue to like SMRT for its growth story in the public transport sector space, its consistently strong operating cashflows and dividend payouts. We maintain our view that the group is likely to capture a significantly higher ridership with the progressive opening of CCL stations (LTA expects ridership of 0.5m/day, when fully operational). Together with a return of tourism, opening of integrated resorts and major events (e.g. F1 Grand Prix, YOG), that should bolster its performance in FY11. We are upgrading SMRT to BUY with S$2.33 fair value (maintained) as the recent weakness in its share price now presents a good opportunity to accumulate the stock.

DB Access Asia Conference 2010 Highlights

Outlook – revenue growth across all divisions, albeit higher costs. Fare revenue likely to increase due to commencement of CCL stage 1 and 2 on 10 April, aided by higher MRT and bus ridership. However, mgmt expects higher staff cost from the increase in headcount and the impact of the cessation of job credits (received S$35m in jobs credit in FY10). We believe this could lead to higher start-up costs to operate CCL as more stages come on stream, and the lag in revenue could limit SMRT’s medium-term profitability.

Update on its overseas ventures. SMRT projects earnings for its 49% stake in Shenzhen Zona to at least more than double from RMB24.1m in CY2008 to RMB48.2m in CY2010 and CY2011. Mgmt expects Shenzhen Zona’s revenues to increase via ramp-up of its bus services to cater to the Bao An district in Shenzhen. Mgmt intends to use Shenzhen Zona as a platform to bid for additional bus and new rail contracts across China. SMRT is also looking to bid for rail contracts in the Gold Coast (Australia) and Honolulu (Hawaii).

New fare gates system could help to boost engineering revenue this year. Management is also working to move upstream by working on the provision of fare gates for DTL and overseas sales. This is being carried out by SMRT’s engineering division and acts as an additional revenue stream. SMRT believes that the global demand for fare gates system to be worth S $54bn and expects the revenue contribution from its fare gates system sales to be recognized in FY11E.

Timing of the award of Downtown Line (DTL). SMRT expects the award of DTL to be announced in a year, as the first stage of DTL commences in 2013. Mgmt expects the DTL tenure to be shorter, at 10-15 years vs the 30-year licences today, as LTA wants to encourage greater contestability. Maintain Hold.

Forecasts cut, fair value reduced

• SMRT Corp Ltd results came in sharply below ours and market expectations, at 10% below consensus EPS of 11.9 cents Singapore.

• We have cut EPS by 3%-4% to 10.3 cents for FY11F and 10.9 cents for FY12F. The lowered operating performance also reduces our fair value by 9% to S$1.99. Stock now trades at premium of less than 15% and we maintain our HOLD rating.

• Only bring spot is a hike in DPS to 8.5 cents for FY10 (7.75 cents in FY09), with final 6.75 cents declared. We believe this would be possible to maintain going forward; however, on recent price surge, yield of 4% p.a. is not compelling.

• SMRT’s 4QFY10 expense growth of 10% YoY, brought operating profit plunge of 28% to S$27mil. This muted FY10’s operating profit growth to 5% YoY. Lower interest and investment income and higher tax rate at 15%, led to flat net earnings of S$163mil.

• Nasty cost surprises were particularly in the area of staff, and repair and maintenance. This hit operating profit margins hard for train and bus operations. Margins in 4QFY10 for train fell to 64% while bus fell to -11%, versus 70% and 3% respectively for 4QFY09. Going forward, firm oil prices caps potential for upside surprises.

• 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 such cost increases. At the same time, savings from Jobs Credit will cease from July 2010.

• SMRT’s fare business performed in line with expectations at topline – FY10 ridership grew 5% YoY to 536.6 million for train and +0.7% YoY to 290 million for bus – though faring worse than FY09 due to a weak 1HFY10. One encouraging note was a pick up in momentum for 4QFY10, with 10% YoY for train and 3% YoY for bus.

• We maintain our FY11 ridership forecast at 9% YoY for train and 6% YoY for bus; buoyed by a strong economy as well as enhanced attractiveness of public transportation with progressive stages of CCL. The Land Transport Authority projects 200,000 ridership for operational CCL 1, 2 and 3.

• Fare cuts implemented on 1 April 2009 resulted in 4% YoY fall in average train fares and 6% YoY fall in average bus fares for FY10. 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.

• One bright spot in non-fare business is that management expects incremental revenue of S$6mil in FY11 from new commercial space to be added at nine stations – of which Orchard and Esplanade Xchange will account for a combined 3,600 sq m.

• Management plans to add to its current taxi fleet of 2,572 as well; however on rising COE prices, yield would be less attractive. Capex projections is now raised to S$150-S$200mil for FY11.

Positives priced in

• Below; downgrade to NEUTRAL. FY3/10 net profit slipped 0.1% yoy to S$162.92m, 9.7% below our and consensus estimates. The underperformance was due to higher-than-expected operating expenses, mainly a result of higher-thanexpected repair and maintenance costs for its bus operations. It also announced a final dividend of 6.75 cents/share. We cut our FY11-12 earnings estimates by 7-8% to account for lower revenue, no thanks to lower average fares from July 2010 onwards and higher operating expenses. We also introduce our FY13 earnings estimates. Due to our earnings cut, our DCF-derived target price is reduced from S$2.41 (WACC 9%, terminal growth 2%) to S$2.35. We downgrade SMRT from Outperform to NEUTRAL as we believe that positives from the opening of Circle Line stages 1 & 2 have been priced in. The stock price has done well in Apr (+11%) and its dividend yields of 3-4% are no longer attractive relative to the S-REITs.

• EBIT rose 4.5% yoy. Despite fare reductions, revenue grew 1.8% yoy, thanks to contributions from the new Circle Line, higher rental revenue and higher overseas revenue. Staff costs rose 6.3% yoy while energy costs fell 12.3% yoy due mainly to lower diesel prices. Repair and maintenance costs rose by 19.4% yoy.

• Operational review. FY10 train revenue rose 1.4% yoy, thanks to higher average ridership (up 5.2% yoy) and contributions from Circle Line’s stage 3 (the first stage to open), offset by lower average fare for MRT. However, bus revenue fell 3.6% yoy on lower average fare. Taxi revenue was down 1% yoy due to a smaller average holding fleet. Rental revenue grew 13% yoy, driven by improved yields and increased rental space. As at Mar 2010, the total lettable space was 28,909 sq m. In FY11, SMRT will have more rental space coming from nine more stations (including six new ones).

• Operating expenses to be higher in 1Q11. SMRT expects 1Q11 revenue to be higher yoy due to the newly-opened Circle Line stages 1 & 2 and higher MRT and bus ridership. However, SMRT also guided for higher opex yoy due to higher energy costs and higher staff costs related to the Circle Line.