Defensive Play

Fair value raised on further opening of Circle Line

• SMRT Corp’s 3QFY10 net profit fall of 5% to S$39.2mil came in better than expected. As 1HFY10 was strong, 9-month net profit rose 13% YoY to S$140.2mil.

• 3QFY10 total revenue rose 6% to S$237.8mil, boosted by a S$4.8mil insurance compensation. Nonfare business, which accounts for 27% of total revenue showed stronger performance than the fare business. Rental income was up 16% YoY to S$17mil as SMRT increased lettable space to 29,000 sqm with an additional five refurbished stations (total 33 at December 2009). Advertising saw an encouraging 4% pick up to S$17mil, and engineering and other services surged 40% YoY helped by a new project management job for a Metro Line in Seoul. Despite a smaller fleet size against a year ago, taxi managed to rise 2% YoY.

• MRT operations in 3QFY10 was marginally better than expected, as average fare per ride fell 3.8% YoY to 88.7 cents Singapore while we were projecting 86.5 cents. We had estimated that the current fare cut implemented for April-2009 to June 2010 would bring average fare down by 4.8% YoY for FY10. However, we have revised this to a 4% YoY fall for full year. This results in a 1% upward revision to MRT revenues across the years.

• Bus operations disappointed on ridership numbers, while there was no upside surprise to average fare which fell 7% YoY to 65 cents. We revise bus ridership across the years down by 1%.

• We are tweaking FY10 net profit lower by 1% to S$178mil, despite the upside surprise in 3QFY10. Main reasons are: (1) Higher energy and fuel costs on back of high oil prices; (2) Higher interest expense with S$50mil increase in debt level to S$300mil. Forecast years are cut by 3% each year.

• Nonetheless, we still project a moderately healthy 9% YoY growth for FY10 net profit, as this is a beneficiary year from sharply lower oil prices (against US$120/barrel peak in SMRT’s 1HFY09).

• After the effects of fare cuts in FY10, prospects look better on topline growth. However, we expect ramp up for Circle Line to drag bottomline. Next phase of Circle Line will see a stretch of 11 stations opening in April 2010, bringing total to 16. Management expects CCL to breakeven only after the entire line is fully operational. Remaining phase is expected to be in FY12. Current ridership on CCL is 30,000/day. At steady state on full operation, CCL is projected to enjoy 200,000 rides/day.

• Our fair value raised by 8% to S$2.19/share. Cash flow is strengthened as management now guides that capex for FY10F will be S$100mil, versus S$150mil previously. In addition, we have increased terminal growth to 1.5% (versus 1.3% previously) with next phase of CCL coming onstream to boost overall lure of the trunk public transport system.

• We maintain our BUY rating with 16% price upside. On FY10 dividend of 7.75 cents (1.75 cents paid in 1H), yield is 4%.

• Last but not least, newly-acquired 49%-associate ZONA in China, made an 8-week contribution. While this is insignificant, management maintains that ZONA will be material in five years time. Nearer-term, ZONA’s earnings is expected to double within two years, from that in 2008.

Fare revenue boosted by higher ridership

• In line; maintain Outperform. 3QFY10 net profit of S$39.2m (-4.8% yoy) was in line with market and our estimates (22% of our full-year number). Our estimates are unchanged. We expect operating expenses be higher in 4Q10 with the opening of Stages 1 & 2 of the Circle Line. As an operator of the Circle, East-West and North-South Lines of Singapore’s metro system, we believe SMRT will be a bigger beneficiary of higher tourist arrivals and population growth. We also believe its rental revenue will grow as it continues to refurbish its commercial space. We maintain our DCF-derived target price of S$2.26 (WACC: 9%, terminal growth: 2%) and see re-rating catalysts from possible further overseas acquisitions and growth from new MRT lines.

• Despite fare reductions, revenue grew 2.6% yoy to S$224.7m, thanks to contributions from the new Circle Line, higher rental revenue and higher overseas revenue. Staff costs rose 7.9% yoy because of the operation of the Circle Line, higher train runs and the recruitment of bus service leaders. Energy costs fell 10.2% yoy mainly due to lower diesel prices. SMRT also booked an impairment charge for goodwill for bus operations, amounting to S$6.6m as it expects long-term bus ridership to decline as commuters shift from buses to trains.

• Operational review. Train revenue rose 1.8% yoy, thanks to higher average ridership (+5.8% yoy) and contributions from Circle Line’s Stage 3 (the first stage to open). However, bus revenue fell on lower average fare. Taxi revenue rose 2.3% yoy thanks to higher hired-out rates. Rental growth (+16.2% yoy) was boosted by improved yields and increased rental space. As at Dec 09, 33 stations had been refurbished.

• Operating expenses to be higher in 4Q10. SMRT expects 4Q10 fare-based revenue to be higher yoy with the help of higher ridership, partially offset by lower fares and higher transfer rebates. It continues to forecast higher fees from overseas projects. 4Q10 operating expenses are expected to be higher yoy due to higher repair and maintenance costs, Circle-Line ramp-up costs and higher staff expenses.

Blip due to impairment

At a Glance

• 3Q10 net profit of S$39.2m (-5% yoy) was within expectations, excluding S$6.6m goodwill impairment
• Operations stable with improving rail ridership and rental revenue contribution
• Maintain Buy, TP: S$2.08 for its low beta and defensive attributes

Comment on Results

3Q10 within expectations excluding impairment. 3Q10 net profit was down 5% yoy to S$39.2m largely due to S$6.6m impairment of goodwill on its Singapore bus operations. Revenue rose 2.6% yoy to S$224.7m on higher rail ridership (+5.8% yoy), Circle Line (CCL) contribution, rental and fees from overseas projects. S$6.6m impairment from buses. The impairment on intangibles was taken on buses as SMRT expects long term bus ridership to be affected by a shift towards rail (with an expanded network), increase in transfer rebates and higher operating costs.

Ridership resilient, rental revenue grew 16%. Average daily ridership for trains continued its uptrend, increasing by 5.8% yoy and 1.7% qoq to 1,493k/day. Average ridership for bus, remained relatively flat (+1.7% yoy, -2.5% qoq) to 782.8k/day. Rental revenue increased 16% yoy to $16.9m with EBIT at S$13.3m (+23% yoy), due to better rentals and 9% yoy increase in lettable space to 29,028 sqm. Rental accounted for c.24% of Group’s EBIT.

Recommendation

CCL 1&2 to open from 17 Apr. CCL Stage 1&2 (11 stations) will open from 17 Apr. CCL is expected to breakeven only when it is fully operational with Stages 4&5, sometime in 2011. However, we believe its resilient ridership from the matured rail lines would buffer the start up costs from CCL.

Buy, TP maintained at S$2.08.. SMRT’s overall ridership will benefit from the opening of stages 1&2 of CCL, coupled with potential increase in rental from additional stations. Furthermore, increasing costs of car ownership, population growth, and growing tourists’ arrivals bode well for rail operations. Buy, TP: S$2.08 based on average of 15x FY10F/11F PE and DCF (WACC 7.2%, 1%).