SMRT Q3 profit rises 7.6% to $41.2m

SMRT Corp continued to roll ahead of the general corporate doom and gloom by announcing a 7.6 per cent year-on-year rise in net profit to $41.2 million for its third quarter ended Dec 31, 2008.

Group revenue in Q3 rose 8.4 per cent to $219 million, driven largely by higher train and bus ridership, as well as the rental and advertising business. But total operating expenses grew 9.8 per cent to $174.8 million because of increases in staff and energy costs, and other operating expenses.

Electricity and diesel costs had risen 35.1 per cent to $30.2 million in the third quarter. Q3 diesel prices have tapered off compared with the first two quarters but are still higher against the same period the year before.

Staff and related costs increased 4.2 per cent to $67.5 million because SMRT has been ramping up recruitment for the Circle Line since Q1. The new MRT line will become operational in the middle of this year. SMRT operates Singapore’s biggest rail network, along with a smaller fleet of buses and taxis.

Average daily train ridership grew 8.4 per cent, boosting Q3 train operations revenue by 9.1 per cent to $119.7 million. Operating profits rose 6.3 per cent to $35.1 million.

Revenue from bus operations also improved by 6.3 per cent to $51.3 million on higher ridership too. But an operating loss of $1.2 million was recorded due to the increase in staff, and repair and maintenance costs.

A lower average hired-out fleet hurt taxi operations, with rental revenue declining 10.3 per cent to $17.4 million, and an operating loss of $226,000.

But engineering and other services saw revenue rise 17.9 per cent to $7.9 million in Q3, thanks to higher consultancy revenue from the Palm Jumeirah monorail project in Dubai. Operating profit grew to $1.1 million from $0.4 million in the previous corresponding quarter.

Earnings per share in Q3 rose from 2.5 cents to 2.7 cents year on year.

For the first nine months ended Dec 31, 2008, SMRT’s net profit rose 7.2 per cent to $124.1 million. Year-to-date revenue was 11.5 per cent higher at $662 million. Earnings per share for the first nine months rose from 7.6 cents to 8.2 cents.

Looking ahead, SMRT said revenue from train and bus operations is expected to be higher in the fourth quarter compared with the previous corresponding period, due mainly to ridership growth. But the rate of growth will be lower than the first three quarters.

SMRT may also cut fares because of the difficult economic conditions. Yesterday, it and the dominant bus operator SBS Transit (SBST) announced that they would not be applying to the Public Transport Council for a fare revision this year

SBST, which also runs the North-east MRT Line and two LRTs, said it is ‘looking to pass the savings it will receive from the 2009 Singapore Budget to commuters’. Under the current fare adjustment formula, the maximum fare increase would be 5 per cent.

SMRT will also pass on the Budget savings to commuters and taxi hirers, as well as donate an additional $300,000 to help needy commuters with their transport costs.

‘In addition to not applying for any fare increase this year, SMRT will work closely with the Public Transport Council to pass on savings from the Budget to commuters by reducing train and bus fares,’ said SMRT president and CEO Saw Phaik Hwa.

SMRT shares closed two cents lower at $1.59 yesterday.

Ridership growth remains key positive

SMRT reported 2QFY09 net profit of S$42.6m, up 7.7% YoY, in line with expectations.

MRT is key contributor to operating profit. MRT revenue rose 13.7% YoY to S$122.8m, and accounted for a 54% revenue share. MRT average daily ridership was up 13% YoY to 1.44m rides. Higher electricity costs however, led to a slower 10.5% YoY increase in MRT operating profit, though this still accounted for a sizeable 70.5% share of total operating profit.

Bus operations was lacklustre. Bus average daily ridership grew 5.8% YoY to 809k rides. However, diesel costs rose 54.1% YoY to S$15.2m, and this contributed to bus operations recorded an operating loss of S$0.9m, versus the S$0.8m gain in 2QFY08.

Fare hike will drive revenue going ahead. The Public Transport Council has approved an average 0.6% fare adjustment on SMRT’s bus and train fares effective 1 Oct 08. Overall, SMRT expects to yield an additional S$3m in fare revenue over the next 12 months from 1 Oct 08.

Commercial space rental remains a star performer. Commercial space rental revenue surged 44.7% YoY to S$14.2m. Though this accounts for only 6.3% revenue share, its share of operating profit is a sharply higher 20.3%. Total lettable space has risen 11.7% YoY to 26,592 sqm.

Earnings forecast adjustments. We raised our FY09 net profit forecast by 7.1% to S$154.8m, due to expectations of higher revenue for 2HFY09. Our FY10 net profit forecast is also raised marginally by 2.6%. We are assuming CY09 average WTI price of US$70/barrel, which is lower than CY08’s US$100. However, SMRT’s 6-mth electricity contract till Mar 09 is at a higher rate (30% higher than the previous 6-mth contract), and therefore the benefits of lower electricity cost will only flow through from FY10 onwards. We have also factored in increased costs with the commencement of the Circle Line revenue service in mid-2009.

SMRT declared an interim dividend of 1.75S¢/share. We are forecasting FY09 dividends of 8.7S¢, based on a 85% payout ratio (versus 78% in FY08). This gives a dividend yield of 5.6%. As the recent market collapse has led to yields of many equities rising sharply, this 5.6% now appears less attractive. The market risk premium has risen from 9.46% in early Oct 08 to the current 10.78%. As a consequence, we are cutting our price target to S$1.65, from the previous S$2.03. Maintain NEUTRAL call on SMRT.

Supported by non-fare businesses

• Within expectations. 2QFY09 net profit of S$42.6m (+7.7% yoy) was within annualised market consensus (S$157m) and our estimate (S$167m). 1HFY09 net profit of S$82.9m constitutes 49.6% of our full-year estimate. 2Q revenue growth of 15.1% yoy to S$227m was ahead of our forecast, mainly driven by higher train and bus ridership, and rental income. Interim dividend declared was S$0.0175.

• Operating expenses. Operating expenses rose 16.9% yoy to S$186m on higher energy costs (+31.1% yoy) and other expenses (+38.6% yoy). Within energy, diesel costs rose 54.1% yoy to S$15.2m, while electricity costs rose 12.9% yoy to S$14.1m. Notably, diesel costs were lower than in 1QFY09 on falling global fuel prices. Staff costs rose 13.5% yoy on higher headcount, salary adjustments and higher CPF contributions. Depreciation was relatively unchanged.

• Operational review. Revenue from train and bus operations increased on strong ridership growth. Operating profit margins improved for all segments, although bus operations were hit by higher diesel costs while taxi operations bore the brunt of diesel subsidies, and higher repair and maintenance costs. Operating losses for bus and taxi operations were S$1m and S$0.5m respectively. LRT operations posted a maiden operating profit of S$0.1m and improved contributions from the Middle East in the Palm Jumeriah operations boosted engineering service revenue. Rental growth was boosted by increased net lettable space (+11.7% yoy) to 26,592 sq m with an average 99.4% occupancy.

• Outlook. We expect revenue to improve further with increased service frequencies to support higher train and bus ridership as more people switch to public transport, while also supported by non-fare segments in rentals and engineering services. We are also mindful of energy costs, although there has been a welcome reprieve with declining global energy prices.

• Upgrade to Outperform from Neutral. We reduce our FY09-11 forecasts by an average 1.6% to account for higher revenue but also higher expenses, resulting in a new DCF-derived (WACC 8.5%) target price of S$2.08 (previously S$2.09). The recent market sell-off has made SMRT attractive again, supported by a dividend yield of 5.7%.

A head above the rest

Story: SMRT’s 2Q results were within expectations. Net profit grew by 7.7% to S$42.6m on the back on a 15% revenue growth to S$227m, arising from increased ridership and rental revenue and others.

Point: The growth in revenue was offset partially by higher operating expenses. Electricity and diesel costs increased by 31% as a result of higher electricity consumption and higher oil prices in 2Q. The Group entered into a new electricity contact from 1 Oct till 31 Mar 09 and the rates are about 30% higher than the preceding contract. It has also hedged about 50% of its remaining diesel requirements at about US$110/bbl. We have already factored the higher cost of electricity into our forecasts and assumed an average diesel cost at a crude oil price of US$105/bbl for FY09F.

Other operating expenses increased by 38.6% due mainly to higher cost of diesel sold and higher operating fees. Its bus operations continued to make an operating loss of S$0.9m mainly due to higher diesel costs. Taxi operations registered an operating loss of S$0.5m, while LRT operations made its maiden operating profit of S$0.2m.

Acquisition of a 49% stake in Shenzhen Zona is expected to complete in 4Q09. Details of expected financial contributions were not shared and we have not factored this into our forecasts.

An interim dividend of 1.75 cents was declared, similar to 1H08.

Relevance: SMRT share price has outperformed the broader market in current times due to the strong ridership numbers, healthy operating results and fundamentals. In our view, the market has priced all these positive attributes in the share price. We pegged our TP at 14x FY10F PER – mid-point of its historical range – equating to $1.60. While we like the company for its defensiveness, we see limited upside for the share price at this juncture. As such, we downgrade to Hold.

SMRT’s Q2 net rises 7.7% to $42.6m

HIGHER train ridership, as well as its rental and advertising business, helped propel SMRT Corp’s net profit forward by 7.7 per cent to $42.56 million for the second quarter ended Sept 30, 2008, compared with the same period a year ago.

Group revenue in Q2 grew 15.1 per cent to $227.03 million as total operating expenses also rose 17.9 per cent to $181.14 million due mainly to increased diesel and staff costs.

‘SMRT has continued to grow its profits in this quarter,’ said president and CEO Saw Phaik Hwa. ‘However, volatile energy costs, inflation and higher operational costs will have an impact on our performance.’

Earnings per share in the second quarter rose to 2.8 cents from 2.6 cents year-on-year.

SMRT operates Singapore’s biggest rail network, along with a smaller fleet of buses and taxis. In Q2, the average daily ridership on the MRT jumped 13 per cent to 1.435 million. During this period, revenue grew 13.7 per cent to $122.8 million, with operating profit increasing 10.5 per cent to $37.1 million.

The company added that LRT daily ridership had also increased – it grew 8.8 per cent to 45,300 in Q2, with revenue 10 per cent higher at $2.3 million. More significantly, it was in the black for the first time since operations started almost nine years ago – Q2 operating profit was $0.2 million compared with a loss of $0.1 million in the previous corresponding period.

But SMRT’s buses and taxis remained in the red in Q2 due mainly to diesel. Higher diesel costs dragged buses to an operating loss of $0.9 million despite improved ridership, while substantial diesel subsidies caused taxis to post a loss of $0.5 million amid declining revenue.

In Q2, diesel costs rose 54.1 per cent to $15.2 million for the group. Together with electricity, total energy costs were up 31.1 per cent at $29.3 million for Q2.

But the biggest component of operating expenses remained its staff and related costs. These were 13.5 per cent higher at $71.8 million. This is because SMRT has been ramping up recruitment since Q1 for the Circle Line, which will become operational in mid-2009.

Rental and advertising revenue in Q2 fared better, rising 44.7 per cent to $14.2 million and 25.6 per cent to $6.0 million respectively. Rental operating profits spiked up 39.3 per cent to $10.7 million, while advertising profit rose 19.9 per cent to $3.7 million.

Revenue from engineering and other services soared 97 per cent to $9.7 million in Q2 due mostly to higher diesel sales and consultancy revenue – derived from the Palm Jumeirah monorail project in Dubai – resulting in an operating profit of $0.9 million.

For the first half ended Sept 30, 2008, SMRT’s net profit rose 7 per cent to $82.87 million. Interim group revenue was 13.1 per cent higher at $442.97 million.

Earnings per share for the first half was 5.5 cents, up from 5.1 cents in the corresponding period. An interim ordinary dividend of 1.75 cents per share has been declared.

Looking ahead, the group expects the operating environment to be difficult in the next 12 months due to the global economic slowdown.