Hop onto this train

• 2Q net profit of S$52.8m slightly ahead (+24% yoy) on lower opex and higher other operating income
• Electricity locked in till Sep 2010, giving more certainty to costs, in our view
• 49% stake in Shenzhen Zona for RMB320m; Zona’s profit expect to double by 2010/11
• Upgrade to Buy; TP: S$2.00 (24% upside)

2Q slightly ahead. Headline net profit of S$52.8m (+24% yo-y, +6% q-o-q) was slightly ahead of our expectations on higher other operating income (S$8.5m, +25.9% yoy) and lower operating expenses (S$174.7m, -3.6% yoy). Topline inched up marginally to S$229.4m (+1.1% yoy) on higher MRT revenues, rental and overseas consultancy fees, but offset by the fare reduction. An interim dividend of 1.75 Scents was declared (similar to 1H09).

Electricity contracts locked in till Sep’10. Management has locked in its electricity contract rates at 11% higher than the previous one which expired in Sep’09. While this would increase its operating costs in 2H vis-à-vis 1H, we believe it gives certainty to its operating results given the current environment.

Fruition of 49% stake in Shenzhen Zona. The agreement has just been signed on 30 Oct for a 49% stake (RMB320m). Historical PAT (2008) of Zona was RMB24.1m, but management guided that profit would more than double by 2010/11 on lower interest costs and a larger vehicle fleet expected. We estimate it would account for c.3% of earnings by then.

Upgrade Buy, TP: S$2.00. We see positive investment attributes in this defensive counter based on its: (i) stable recurring earnings on firm ridership; (ii) foray overseas and the potential in its associate, which management appears to be very optimistic about; and, (iii) that the counter has been overlooked recently over higher beta plays. Our TP is based on an average of 15x FY10/11F PER and DCF (WACC 7.2%).

Ridership rises

• Maintain Outperform. 2QFY10 net profit of S$52.8m (+24.1% yoy) was 15% above our and market consensus, accounting for 31% of our full-year estimates. The outperformance was due to lower fuel costs and a fall in other opex. Our earnings estimates are unchanged as we expect operating expenses be higher in 2H10. Maintain Outperform with our DCF-derived target price unchanged at S$2.09 (WACC: 8.6%, terminal growth: 2%). We like SMRT as a beneficiary of higher tourist arrivals in Singapore. Rerating catalysts could include further overseas acquisitions and growth from new MRT lines.

• Above expectations. Despite fare reduction, revenue grew 1.1% to S$229.4m thanks to contributions from the new Circle Line, higher rental revenue and higher overseas revenue. Operating expenses fell on lower energy costs (-16.9% yoy) and other expenses (-8.8% yoy). Within energy, diesel costs fell by 44% yoy to S$8.5m, while electricity costs rose by 113% yoy to S$16m due to increased train runs and the operation of Circle Line. An interim dividend of 1.75/share was declared.

• Operational review. Train revenue rose marginally thanks to higher average ridership and contributions from the Circle Line. However bus revenue fell on lower average fare and average daily ridership while taxi revenue fell on smaller average hired-out fleet. Rental growth (+13% yoy) was boosted by improved yield and increased rental space.

• Operating expenses to be higher in 2H10. 3Q09’s fare-based revenues are expected to be lower yoy on lower fares and higher transfer rebates. However SMRT is expecting higher rental revenue and higher fees from overseas projects. Outlook for taxis has improved after trimming the fleet by 12% yoy. 2H10 operating expenses are likely to be higher hoh due to more scheduled repairs and maintenance, and costs related to the opening of remaining Circle Line stations.

SMRT’s Q2 net profit rises 24% to $52.8m

LOWER energy costs and the government’s Budget measures helped SMRT Corp to a 24.1 per cent year-on-year increase in net profit to $52.8 million for its second quarter ended Sept 30.

Measures like the Jobs Credit scheme and property tax rebates, as well as lower operating expenses, lifted profit, though this was partly offset by a fare reduction package that began on April 1.

Q2 revenue grew more slowly, edging up just 1.1 per cent to $229.4 million, mainly due to higher revenue from the operation of Circle Line Stage 3 (CCL3), increased rental revenue and higher revenue from overseas.

‘We have delivered a reasonable set of results this quarter,’ said SMRT president and chief executive Saw Phaik Hwa. ‘Looking ahead, the group’s profitability will continue to be impacted by the fare reduction package ending June 2010, lower Jobs Credit, volatility in diesel prices and the ramp-up costs to prepare for the progressive opening of the remaining Circle Line stations.’

SMRT runs Singapore’s biggest rail network, plus a smaller fleet of buses and taxis.

Revenue from train operations rose a marginal 0.4 per cent to $123.3 million in Q2 – despite the fare reduction – because of higher average daily ridership and the start of CCL3. Along with higher other operating income, operating profit rose 7 per cent to $38.7 million.

Bus revenue slipped 4.6 per cent to $51 million on lower average fare and average daily ridership. But lower diesel costs resulted in an operating profit of $1.8 million, compared with an operating loss of $1.1 million a year back.

Taxi rental revenue fell 2.6 per cent to $17.9 million in Q2 on a smaller average hired-out fleet. But taxi operations posted an operating profit of $0.8 million because of lower other operating expenses from a smaller average holding fleet.

The rental business fared better, with Q2 revenue growth of 13.1 per cent to $16.1 million on better yield and increased space at redeveloped MRT stations. Operating profit climbed 10.8 per cent to $12.7 million.

Equally robust were engineering and other services, with revenue rising 38.0 per cent to $13.4 million and operating profit soaring five times to $5.5 million on increased contribution from consultancy and overseas projects.

But advertising revenue slumped with the economic downturn and was down 9.8 per cent to $5.4 million, causing operating profit to fall 10.8 per cent to $3.4 million.

For its first half ended Sept 30, 2009, SMRT’s net profit rose 21.9 per cent to $101.0 million. But year-to-date revenue edged up only 0.5 per cent to $445.3 million.

An interim ordinary dividend of 1.75 cents per share has been declared.

Looking ahead, SMRT said that third-quarter group revenue is expected to be higher, mainly because of stronger non-fare revenue from rents and fees from overseas projects. In addition, the first payment of 240 million renminbi (S$49 million) for 49 per cent equity interest in Shenzhen Zona will be made by Q3.

2Q10 results: another pedestrian quarter

● SMRT delivered September 2009 quarter results that were largely in line with our estimates. Revenue grew 1% YoY, while earnings were up 24% YoY, due to lower fuel costs (-17% YoY), savings from the government’s Jobs Credit initiatives, and boost from other income.

● Management declared an interim dividend of S1.75cts, unchanged from the previous year, and shared further details on the recently completed Shenzhen ZONA acquisition, which is expected to contribute materially to earnings within five years.

● 6MTD revenues and earnings are at 50% and 65% of our full-year estimates, respectively. Going forward, we see costs rising in line with increased staff and maintenance expenses for the CCL Stage 3, and the new six-month electricity contract at 11% higher tariffs. Beyond factoring in contributions from other income (in FY10) and ZONA (from FY11), our forecasts are kept largely intact.

● We continue to see SMRT’s valuation at about 16x P/E as demanding versus its 14x historical average, the Singapore market, and CD, given the latter’s stronger earnings profile and China leverage. Our DCF-based target price is S$1.60 (from S$1.57). We maintain our UNDERPERFORM rating.