On track

• Maintain Outperform; target price raised. On Tuesday, we attended a conducted tour of the Circle Line (CCL) Stages 1 & 2, which will officially open on 17 Apr. Although SMRT’s stock price has gone up 27% since our upgrade in 4Q09, we believe there is further upside as the opening of Marina Bay Sands in mid-2010 is likely to give its MRT ridership another jolt. YTD MRT ridership has exceeded our expectations. We raise our FY10-12 earnings estimates by 1-3% to account for the higher ridership, which lifts our DCF-derived target price from S$2.26 to S$2.41 (WACC: 9%, terminal growth: 2%).

• CCL expected to break even by 2011. Train ridership for Stage 3 now stands at 49,000-50,000/day. Officially, LTA is expecting CCL to directly benefit 200,000 commuters daily, once Stages 1 and 2 are opened. However, SMRT is more optimistic, and expects ridership to exceed LTA’s targets. SMRT expects CCL to break even once the last two stages (4 and 5) open in 2011.

• SMRT has more to gain than ComfortDelgro, we believe. As a bigger train operator than CD, SMRT should be a bigger beneficiary of higher tourist arrivals in Singapore and population growth. We also believe its rental revenue will grow as its commercial space increases with the new CCL. More than 80% of the 2,500-plus sq m commercial space available has been snapped up.

All good news factored in; negative near term factors

• We have changed our rating on SMRT to HOLD from previous BUY. Shares have appreciated 13% since our last report on 28 January 2010 and 26% since our initiation on 2 July 2009.

• SMRT is currently trading close to our fair value of S$2.19/share with limited room for upside revision in the near term, as much of good news has been factored.

• Ridership boost from next week’s opening of Circle Line (CCL) 1 and 2 has been factored into market estimates. Combined with CCL 3 (five stations spanning 6km), which has been operational since May 2009, LTA estimates ridership of 200,000 per day for CCL1, 2 and 3. CCL 1 and 2 spans 11 stations across route of 11 km.

• Recent pick up at CCL3 encouraging but small impact in overall scheme of things. In the early days of operation, CCL3 struggled to achieve 30,000 rides per day. We understand this ramped up to about 50,000 last week. We expect CCL1, 2 and 3 to support our ridership projection of 9% growth in FY11 to 587 million, taking some cannibalization of East-West and North-South lines into consideration.

• Potential increase to rental income also factored in. About 2,500sq m of commercial space at various stations available for lease will come onstream in FY11, adding to the current 30,000sq m. Another 1,700sq m in nett lettable area from Orchard Exchange will come onstream in FY11/12, and another 2,500sq m in FY12 with Jurong Extension.

• Largest addition in the near term is Esplanade Exchange, which offers 2,000sq m. Eighty percent of this has been committed for the typical tenure of three years, and rental income will start to flow through progressively through the year as tenants complete their fittings and start business operations.

• Biggest commitment is from Infocomm Development Authority (IDA) with 450sq m. The Experience Centre will start to showcase Singapore’s Next Generation National Broadband Network (NGNBN) from June 2010. Other tenants that have signed up include Sony, StarHub, convenience stores such as Guardian Pharmacy and Seven Eleven, food outlets such as Burger King, Polar Cafe, Coffee and Toast as well as a foodcourt; to name some.

• Breakeven not achievable despite 200,000 daily ridership for CCL 1, 2 and 3. The remaining CCL 4 and 5 comprising another 13 stations on a route of 17km is expected to be handed over from LTA only in FY12.

• Several negative factors in the near term reduce potential to upgrade estimates:

(1) Oil price is again above $80 per barrel and trending towards S$90.

(2) Reduction of benefits from the Government’s Jobs Credit scheme will be felt most in FY11F.

(3) No significant expansion for taxi fleet despite economic pick up as COE prices are expected to surge with the expected cut in COE quota over the next few months.

• Stock is fully valued at current levels as we project earnings fall of 8% in FY11. SMRT reports FY10 results on 30 April; our expectations are for full year growth of 9% to S$177.9mil.

Visit to Circle Line Stages 1 and 2

Circle Line to boost ridership… We had a sneak preview of Circle Line (CCL) Stages 1 and 2 yesterday, almost two weeks ahead of its official opening on 17 April. All 11 stations from CCL Stages 1-2 are fully ready for operations, except for a few minor fittings and installations. When opened, ridership from this stretch of 16 stations (including five existing CCL Stage 3 stations which have been in operation since last May) is expected to jump to 200k commuters, up from almost 40k for the first five stops currently. We understand from management that it is not expecting the network to breakeven immediately with the additional stations. However, we continue to hold our optimism that SMRT is likely to attain another level of growth as it captures higher train ridership from the progressive opening of CCL. The rest of the CCL stations (Stages 4 and 5) are slated to open in 2011. When this happens, the CCL is expected to see ridership of 500k commuters, which would contribute significantly to its top and bottom line, in our view.

…and rental and advertising revenue. Apart from higher ridership, CCL Stages 1 and 2 are expected to give a boost to its rental and advertising revenue. According to management, this is estimated to add approximately 2,500sqm of net lettable rental space (out of which 2,000sqm is from Esplanade Xchange, which is located right at the heart of the bustling city area), or 8.6% of its total lettable space in 3QFY10. The take-up rate has also been encouraging at the mid-80s level, and committed by a variety of retailers and food chains at competitive market rates and average tenancy period of three years. In addition, we see ample room for advertising opportunities in these stations, considering the human flow and available space.

Fair value raised to S$2.22; maintain BUY. We are maintaining our BUY rating on SMRT. We like the group for its defensive nature, consistently strong operating cash flows and dividend payouts. As the group enters a new fiscal year (FYE 31 Mar), we now roll our valuation to FY11 (forecasts kept intact). This raises our DDM-based fair value from S$2.05 to S$2.22, or 19x FY11F EPS (still within 5-year PER range of 11-22x).

New Milestone

• The stock hit an intraday high of $2.02 yesterday, before ending below the $2.00 resistance, that being the record closing high and first reached in May '07.

• The April 17th opening of 11 more Circle Line stations (Stages 1&2 / Dhoby Ghaut to Tai Seng) could be a factor, although that's been known for a while now.

• Stages 4 & 5 (12 stations / Caldecott to Harbourfront are scheduled for completion in 2011.

• Other contributing factors behind SMRT's performance include:

– Singapore's continued population growth, now passing 5 mln.

– Strong recovery of tourist arrivals, with 2010 likely to surpass 2007's 10.3 mln peak.

– Continued growth in train ridership (hitting a record high of 47.25 mln in Dec '09), especially relative to bus, which has stagnated, and which explains SMRT outperforming Comfort Delgro, which remains stuck in the $1.50-1.70 range, and despite being the "favorite" of many to be appointed the operator of the new Downtown Line (40 km / 33 stations), scheduled for completion in 2016.

– The refurbishment of the Esplanade Exchange is expected to result in 2000 sq meters of additional rentable space. (Rental income is an increasingly important contributor to SMRT's bottom-line. As at end Dec '09, retail space totaled 29,028 sq meters, vs 23,501 sm three years ago.)

– Likely fare increase when PTC next conducts its annual review in July.     

• SMRT is expected to release results for fiscal year ended Mar '10 around Apr 23rd. Final dividend will be no less than 6 cents after the 1.75 cents interim, which would make this the third consecutive year SMRT is paying 7.75 cents per share. At $1.99, yield is still a "decent" 3.9%.

• We are keeping our BUY call. Trailing PE is 16.9x. (Profit for 9 months ended Dec '09 of $140.23 mln was up 13% over the same period the year before.)