SMRT’s Q4 profit falls 41.4% to $22.7m on higher costs

But increasing train ridership helps Q4 revenue climb 3.7% to $225.1m

SMRT Corp’s net profit for the fourth quarter ended March 31, 2010, slipped 41.4 per cent to $22.7 million on higher staff expenses and repair and maintenance costs, as well as an increase in income tax. But Q4 revenue climbed 3.7 per cent to $225.1 million on higher train ridership.

The higher staff costs were due to the opening of the Circle Line. Stage 3 of this new orbital line was opened for operations in May 2009, followed by Stages 1 and 2 in April 2010. SMRT said the rest of the Circle Line – Stages 4 and 5 – will open in 2011.

Earnings per share for the fourth quarter was 1.5 cents – down from 2.5 cents in the same quarter a year ago.

For the full year, net profit for Singapore’s biggest rail operator rose a marginal 0.1 per cent to $162.9 million while full-year revenue inched up 1.8 per cent to $895.1 million. Operating income was higher and the company benefited from the government’s budget measures, lower energy costs and lower other operating expenses.

FY2010’s earnings per share was unchanged at 10.7 cents.

A final ordinary dividend of 6.75 cents per share has been proposed, bringing the total dividend for the year to 8.5 cents.

‘SMRT has achieved a satisfactory net profit of $162.9 million despite the fare reduction,’ said SMRT president and CEO Saw Phaik Hwa.

She said train ridership for FY2010 had increased 5.2 per cent as compared with a year earlier.

‘We expect the recovery of the Singapore economy and the progressive opening of Circle Line stages to continue to contribute to the increase in ridership,’ Ms Saw added.

During FY2010, revenue from train operations rose 1.4 per cent to $480.7 million due mainly to higher MRT ridership from the North-South and East-West lines and contribution from Circle Line Stage 3. Total ridership for the full year had risen 5.2 per cent to 536.6 million.

But the revenue increase was partially offset by lower average MRT fare. Operating profit was 0.6 per cent lower at $129.7 million, mostly because of higher repair and maintenance costs, staff and related expenses and electricity costs.

SMRT also runs a smaller fleet of buses and taxis. Its FY2010 revenue from bus operations slipped 3.6 per cent to $199.7 million mainly because of the lower average fare. A lower operating loss of $1.9 million was incurred compared with $4.9 million the previous year mainly due to lower diesel cost, although this was partially offset by the provision for the fuel equalisation account.

The group’s taxi operations posted 1.0 per cent less revenue of $71 million. Operating profit returned to the black with $1.8 million against an operating loss of $6.3 million a year ago.

Two other businesses also showed strong gains – rental, and engineering and other services. Rental revenue jumped 13 per cent to $65 million as a result of better yield and expanded space following the redevelopment of MRT stations. Operating profit was up 9.4 per cent at $50.8 million.

Revenue for engineering and other services jumped 29.8 per cent to $47.3 million on improved consultancy revenue, partially offset by lower diesel sales to taxi hirers. Operating profit surged 55.9 per cent to $9.9 million but this was partially offset by higher allowance for doubtful debts.

Going forward, Ms Saw said that a 2.5 per cent fare reduction in accordance with the fare formula would be applied to the overall fares once the 15-month fare discount of 3 per cent ceases from July 3, 2010.

She added: ‘In the next 12 months, volatility in energy prices and the cessation of government budget measures as announced in the budget speech 2009 will also impact our profitability.’

Hold (Downgrade)

• MRT Riderships grew 5% y-y and 17% m-m

• Circle line stage 2&3 will add to riderships and rental income

• Advertising segment rebounding strongly

• Upgrading our fair value to S$2.42 on the back of stronger ridership growth

• Limited upside of 8% to our fair value, downgrading to Hold from Buy

Changes to the Fare structure

Public Transport Council (PTC) announced the full fare reduction of 2.5% from July’10 and the complete removal of transport penalty. We will finally move towards a distance based public transport where we pay for the actual distance traveled irregardless of the number of mode of transport. According to PTC, 61% of adult commuters will save $23 yearly and 35% of commuters will see an increase of $16.

Updated rideship figures

MRT riderships continue to grow strongly registering a 5% growth for the period (Mar’09-Mar’10) from the same period a year earlier. This was within our estimates of 5% growth and on month month basis ridership grew 17% in March’10. Going forward, the opening of more stations, improved connectivity and affordable fares we think will continue to fuel riderships growth. We are forecasting a 10% increase in riderships for FY2010 while LTA expects circle line to add an additional 200,000 to riderships daily from circle line stage1, 2, 3.

Expect record year of earnings for FY10 ending March’10

We feel that SMRT will be able to achieve another record year of earnings again with net profits coming in at S$187m on the back of S$933m in revenues, representing a year on year growth of 15.3%. The advertising segment will probably show a strong rebound in 4Q10 benefiting from the strong GDP growth of 13.1% y-y by the Singapore economy and upcoming mega events like Youth Olympics. We forecast SMRT to maintain their dividends of 7.75 cents for FY2010 representing a yield of 3.5%. SMRT will be releasing their FY10 results on 30th April 2010.

Valuation and Recommendation

Since our Buy recommendation on 28th January 2010 (S$1.89), SMRT has rose 18.5% and exceeded our target price of S$2.19, and with ridership figures showing strong growth and advertising segment rebounding strongly, we are upgrading our target price to S$2.42. However the current price has limited upside to our fair value and we are downgrading our recommendation to HOLD based on our stock selection system. Our DCF model is based on a risk free rate of 2.78% and 1% terminal growth.

We are downgrading our Buy rating to HOLD but upgrading our fair value estimate to S$2.42 from S$2.19 representing a potential upside of 8% from the closing price.

Small Impact

• The end of transfer penalties and the resultant decline in overall train / bus fares will lead to about $16 mln loss in revenue on an annualized basis for both SMRT (as well as for Comfort Delgro‘s SBS Transit).

• But somehow, as in the past, such “setback” (like the costs associated with the Circle Line) will probably not affect SMRT’s bottom-line much.

• Fact remains SMRT is at a new all-time high (obviously also benefiting from the surge in COE premiums for instance), while Comfort Delgro is 35% off its high.

• One can only hope SMRT stays Singapore-centric.

• We are holding on to our BUY call.

• SMRT will release its result for ye Mar ’10 on Friday Apr 30th. An unchanged 6 cents final dividend is a forgone conclusion. (Together with the 1.75 cents interm, yield at $2.19 is 3.5%.)