Investment Highlights

• We initiate coverage of SMRT Corp Ltd (SMRT) with a BUY rating. Fair Value of S$2.11 presents a 19% upside to current price. We have applied a DCF approach to SMRT’s
  steady cash flows, with terminal growth at 1% and netting off S$1bil for the 30-year licence extension and transfer of assets for the new Circle Line.
• Amid a slow economy, SMRT’s earnings are defensive with 80% revenue derived from the public transport fare business. We expect ridership growth on trains and buses to be supported, as costs of private vehicle usage continues to increase, while its rail and bus network continues to improve in terms of convenience (connectivity, shorter travel times and shorter headways) and affordability.
• We project 12% growth in mass rapid transport (MRT) ridership for SMRT to 572mil in FY10 and 9% to 623mil in FY11. This will offset average fare cut of 4.6% implemented from 1 April 2009 until end-June 2010.
• With the progressive opening of SMRT’s new Circle Line – first phase having started in May 2009 with 2nd phase in 2010 and 3rd phase in 2011 – we would expect some new
  comers to public transport. But the impact will be somewhat muted on incremental ridership as some rides on Circle Line may cannibalise rides from SMRT’s other two
  MRT lines. Early estimates put ridership on Circle Line’s first phase at 55,000 per day, rising to 0.5 million at a steady state upon full operations of the entire line.
• Lacklustre taxi operations will be offset by growth in rental and engineering/other services segments. SMRT will continue to redevelop its MRT stations into lettable commercial space, which are in high demand for its location in high pedestrian traffic areas. So far, SMRT has renovated about half of its stations.
• With oil prices off last year’s peak, SMRT stands to benefit as about 20% of its costs are energy-related items. As such we expect an improvement in EBITDA margins from 33% in FY09 to 34% in FY10. But we expect margins to revert to 33% in FY11 with increasing costs from further phases of the fully underground Circle Line.
• Steady cash flows can comfortably support capex of S$150mil per annum for continual upgrading and expansion of transport fleet, station renovations and other system and service improvements. This leaves enough room to maintain DPS at 7.75 cents Singapore per annum. In addition, we estimate a potential for paying out a special dividend of 1.5 cents in FY11 if management wishes to.

Circle Line to provide new chapter of growth

Circle Line to boost ridership growth. After months of grueling trial runs and safety checks, the Circle Line Stage 3 (CCL3) was finally opened for passenger service on 28 May 2009. SMRT Corporation, the operator of CCL, is excited about the growth opportunities the new rail line will provide. According to management, this orbital line, which essentially links up the existing radial lines, is likely to lead to offer better connectivity, higher ridership for the group, and reduced travel time and fares for commuters. We are equally optimistic, as passengers are likely to see greater incentives to take rail transport, and may switch from bus to train for reliability and frequency reasons. We understand from Land Transport Authority (LTA) that it is expecting 55,000 people to use the five CCL3 stations each day. As more stations along the CCL are progressively opened in 2010, we expect significantly better ridership, and in turn better revenue for SMRT coming from enhanced accessibility and bus-rail integration initiatives by LTA.

Leveraging track record for local and overseas opportunities. Apart from the higher ridership growth that SMRT is expected to enjoy, the group also said that successful operation of the CCL would further build on its widely-proven track record and better position itself for opportunities both locally (e.g. bid for Downtown Line) and overseas. In fact, during our visit to SMRT’s Kim Chuan (CCL) Depot a month ago, management revealed that the depot has been strategically built to be able to house 70+10 trains – enough capacity for trains meant for the Downtown Line. Should the group win the bid to operate the new network, it has already in place plans for achieving synergies with its main lines. This, in our view, is a clear testimony of SMRT’s far-sighted goals and dedicated management team.

Reiterate BUY. We see SMRT as a stock offering good growth potential but it has to a certain extent been neglected as investors switch from defensive to higher-beta plays. Despite our seemingly over-optimistic view on the group, we note that our FY10-12F earnings are not aggressive (still 1-4% below consensus). With consistently generous dividend payouts of at least 60%, backed by strong operating cash flows, we keep our BUY rating and S$1.81 DDM-derived fair value on SMRT. Key risks to our valuation include lower-than-expected average fares resulting from fare-reduction package and potential adverse effects from H1N1 influenza outbreak.

Results largely in line

Reiterate BUY rating at fair value estimate of S$1.92. The full year results for FY2009 announced recently were largely inline with our estimates. The Group produced relatively good results as well as a final dividend proposal of 6 cents per share. We have adjusted our operating expenses slightly thus our discounted free cash flow to equity model eased our fair value estimate to S$1.92 (previously S$1.97).

Growth delivered in earnings for FY2009. The Group announced growth in revenue of 9.6%, from S$808.12 million in FY2008 to S$878.95 million in FY2009; and registering growth in net profit after income tax of 8.5%, from S$149.94 million in FY2008 to S$162.73 million in FY2009 on the back of higher operating profits coupled with government budget measures. The Group attributes the growth in revenue to mainly higher train and bus ridership, higher rental and advertising revenue, increased consultancy revenue and higher project management fees. MRT ridership increased 8.7% to 510.2 million together with a full year ridership growth of 3.9% to 288 million for buses. The taxis segment however, suffered a full year operating loss due mainly to higher loss on disposal of taxis.

The rental segment achieved a growth of 37.0% from S$41.98 million in FY2008 to S$57.53 million in FY2009 due mainly to better yield and increased space following the redevelopment of commercial spaces at various MRT stations. Advertising revenue increased 13.8% from S$19.81 million in FY2008 to S$22.54 million in FY2009, mainly due to increased advertising on buses, taxis, trains and at MRT stations. Revenue from Engineering and Other Services increased as well. From S$23.54 million in FY2008 to S$36.46 million in FY2009 due mainly to increased consultancy revenue, higher diesel sales and higher project management fees from the Palm Jumeirah Project in Dubai.

Rise in operating expenses. The Group’s expenses increased by 11.2% from S$644.95 million to S$716.94 million. This was due to a rise in staff and related costs of S$13.9 million (5.3%) in FY2009, increase in depreciation by S$4.3 million (4.0%), higher repair and maintenances costs by S$3.1 million (5.0%), electricity and diesel costs increasing by S$29.1 million (32.4%) and an increase in other operating expenses by S$21.6 million (17.6%) in FY2009.

Circle Line Stage 3 commencing in May 2009. The rolling out of the circle line in May this year should seek to increase ridership further although we do also believe that this should lead to higher expenses in the coming first quarter 2010 due mainly to higher staff and related costs, as headcount is expected to increase for the circle line launch.

Final dividend proposed. The Board of Directors proposed a final ordinary dividend of 6.00 cent per share, totaling S$91.0 million. The final dividend, if approved, will bring the total dividend per share to 7.75 cents for the year.

As expected as train arrivals

• 4Q09 results within expectations
• Train ridership up by a firm 9% y-o-y, but expect slower growth in FY10F.
• Dividend of 6 cents, bringing full year dividends to 7.75 cents
• Maintain Hold with TP: S$1.65.

4Q09 net profit $39m (+8% y-o-y). 4Q net profit of S$38.7m (+13% y-o-y, -6% q-o-q) was in line with expectations. Topline ended at $116.2m, up 4% y-o-y. For full year, revenue and net profit ended at $879m (+10%) and $163m (+9%), respectively. Its MRT, rental and advertising continued to be the main contributors to its operating profit. Bus division was affected by higher diesel costs and maintenance, while losses at Taxi division was due to lower hired out rate and losses on disposals.

Final dividend of 6.0 cents. A final dividend of 6.0 cents was proposed, bringing total dividends to 7.75 cents for the full year. This equates to a payout of 72% of PATMI. Book closure date is 30 Jul 09.

Outlook. Train ridership for FY09 was up 9% to 510.2m rides. We expect ridership to remain relatively firm, albeit growing at a slower pace. We are assuming a 3% and 1% growth for its train and bus ridership in FY10F respectively. Rental should continue to see growth, albeit slower, on higher lettable space. Advertising should be affected by the slower economy.

Maintain Hold, TP: S$1.65. We maintain our Hold recommendation, TP: S$1.65 still based on 14x FY10F PER (mid-trading range). Our forecasts are trimmed slightly by 3-4% largely on a lower ridership growth. We believe the stable operations, relatively resilient business model and a 5% yield should provide support to the share price.