Category: SMRT
Transportation – DB
Fare hikes slightly less than expected
Effective fare hike expected to be small; Comfort the stock to own
The net effective fare hike granted was slightly less than our expectation of 1%, but given the defensive characteristics of both SMRT and Comfort we maintain Buy. Comfort in particular offers good value, and if oil prices continue to decline, this could offer upside to our earnings estimates. Ridership growth for both trains and buses remains strong.
Fare hike offered, strategy is clearly to drive up public transport ridership
The Public Transport Council (PTC) has granted an overall net fare adjustment of 0.7% for 2008. This was slightly less than the 1% we expected. The headline percentage fare hikes are more (5.5% in some cases) but the net benefit for Comfort’s bus and train operations is expected to be 0.9% and for SMRT’s operations 0.6%. The difference in headline increase and the effective increase is because the transfer rebate to passengers was increased from 25 cents to 40 cents.
Transfer penalty will be fully removed in 2009
Under the Land Transport Masterplan, distance-based through fares will be introduced in 2009 to make transfers more seamless in the hub-and-spoke public transport system. So in 2009, when the fare hike requests are again reviewed, the net effective fare hikes are likely to be smaller than the headline numbers would indicate.
SMRT has contracted electricity prices; diesel prices unhedged for both
SMRT has contracted its electricity prices through to March 2009. While this should ensure stability in the cost structure, we note that the new contract was about 30% over the earlier one. Both ComfortDelGro and SMRT have no hedges in place for diesel, but indicate that they are reviewing this closely.
Comfort TP S$1.97; SMRT TP S$1.95
For ComfortDelGro our TP of S$1.97 is based on a dividend discount methodology, assuming an explicit three-year growth forecast of 5% and a 3% terminal growth rate. The assumed payout ratio is 80% and cost of equity derived is ~8%. Given that the company continues to make acquisitions and grow overseas, our forecast of 5% growth over the next three years should be easily achievable. We transition growth over three years to a terminal growth rate of 3%. Dividend payout assumption during the stable growth phase is 85%. The downside risks are higher fuel costs, for which the company currently has no hedges, and execution missteps for acquisitions overseas.
Our target price for SMRT of S$1.95 is based on a ROE/PB-growth methodology (ROE/COE), assuming a c.8% discount rate, 6% three-year explicit forecast growth rate and 3% terminal growth rate, and ROE of c.21%. The ROE of 21% is benchmarked against current run rates. This is based on SMRT’s current ROE run rate and an assumption that the company is mostly in a terminal growth rate mode. On the downside, risks include lower-than-expected ridership, softness in the rental business for some stations when lease renewals become due, higher fuel costs, and competition in the taxi business.
Transport – BT
SBS, SMRT apply to raise bus and train fares on Oct 1
Reason cited: Higher cost pressures because of rising energy prices
SINGAPORE’S two largest public transport operators have applied to raise bus and train fares later this year. Yesterday, SBS Transit and SMRT Corp confirmed they have applied to the Public Transport Council (PTC) to lift fares, citing the same reason: higher cost pressures because of rising energy prices.
SMRT said in a statement that even the maximum fare adjustment of 3 per cent – about four to five cents – would not fully offset cost increases due to an ‘inflationary and higher operating cost environment’.
However, any increase is likely to be kept below one per cent, even though this year’s fare adjustment formula allows for a maximum 3 per cent jump, according to comments made by PTC chairman Gerard Ee last month. Any fare changes will kick in on Oct 1.
In FY 2008, SMRT’s energy costs soared 18 per cent to $89.7 million due to higher electricity and diesel prices. Of this amount, electricity accounted for $47.5 million, an increase of 19 per cent from the previous year.
Diesel costs for bus operations rose 17 per cent year-on-year to $42.2 million. SMRT said that it also fully absorbed the Goods and Service Tax increase of two percentage points.
SBS Transit said that it faces mounting operating costs from running the North East MRT line and most of the island’s bus services. Its spokeswoman Tammy Tan said that the company is trying to keep concession, children and student fares unchanged.
The PTC has said that it will carefully evaluate the proposals from SMRT and SBS Transit before making a decision this month. It said in a statement that it is considering the need to increase transfer rebates, preferring to have both transport operators bear part of the cost to soften the blow on passengers. The council has said that it will take into account an increasing ridership – which can boost operators’ revenue significantly – when firming up its decision.
Last year’s fare increase cap pushed bus fares up by two cents. SBS shares closed unchanged at $2.15 yesterday while SMRT was up by two cents to $1.80.
SMRT – Kim Eng
Q1FY09 results
Still keeping ahead but just barely
Revenue growth of 11% was driven by MRT and rental income. However, a 36% jump in electricity and diesel costs as well as fuel subsidies to taxi hirers eroded EBIT margin from 23% to 22.3%, leading to only 6% growth in net profit. Train profits were higher YoY but LRT, buses and taxis slipped into the red, mainly due to higher energy costs.
Higher train ridership offset by higher staff & energy costs
Train average daily ridership rose 10.9% during the quarter, boosting operating profit by 9% but gains were eroded by higher staff and electricity costs. Staff costs rose 8% due mainly to headcount of 230 engineers added (another 100 to go) for Circle Line Stage 3 which will be revenue-ready by June 2009, as well as salary adjustments and the 1.5%-point hike in employer’s CPF rate in July 2007.
Energy costs still a big headache
The high cost of diesel is still a big headache for SMRT. If diesel price remains high, buses and taxis in particular will operate at a loss. For taxis, SMRT provides direct subsidies to its taxi hirers to the tune of almost $1m in Q1FY09. It currently does not engage in any hedging as prices are still too volatile.
Saved by rental income
Fortunately, aggressive growth in rental income from commercial spaces at MRT stations (+47% in Q1FY09) as a result of better rental yield and more space following asset enhancement exercises helped to recover some of the gains SMRT gave up to energy and staffing costs. Management expects an incremental $10m rental revenue this year as it is still in the process of upgrading seven more station.
Dividend decent but no catalysts, maintain HOLD
Dividend yield is projected at 4.7% this year, decent but nothing to shout about. While management is hopeful that the PTC will allow a fare increase later this year, it is unlikely to fully cover higher operating costs. Given the lack of catalysts, we maintain our HOLD call.
SMRT – DBS
Cost concerns linger
• Within expectations. 1QFY09 net profit of S$40.3m (+6.2% yoy) was within annualised market consensus and our forecast of S$160m, contributing 25% of our full-year estimate. Revenue growth of 11.2% yoy to S$215.9m was slightly ahead of our expectations, mainly driven by higher train ridership and rental income.
• Higher operating expenses. Operating expenses rose 15.7% yoy to S$135m on higher energy costs (+36.2% yoy) and other expenses (+21.1% yoy). Within energy, diesel costs rose 72.3% yoy to S$15.9m, while electricity costs rose 9.5% yoy to S$13.7m. Despite a bigger headcount in preparation for the opening of the Circle Line Stage 3 in mid-2009, staff costs were relatively contained (+7.8% yoy) while depreciation expenses dipped 0.7% yoy. Management expressed concern about sustained high energy costs, especially diesel, and may take the opportunity to hedge should prices fall in the near and medium term.
• Operational review. Revenue from train and bus operations increased on higher ridership, as high petrol prices and ERP charges forced more private car owners into taking public transport. Operating profit margins improved for all except bus operations, which were hit by higher diesel costs. As a result, bus operations lost S$3.3m at the operating level, vs. a S$0.5m profit a year ago. Growth drivers were mainly trains and rentals. Net lettable space rose 13.8% yoy to 26,264 sq m with an average 99.1% occupancy.
• Outlook. We expect SMRT’s topline to improve further on higher train and bus ridership with increased frequencies as marginal private car owners switch to more affordable public transport. However, energy costs should remain a challenge, despite the prospect of a fare hike in 4QCY08.
• Maintain Underperform. We have adjusted our FY09-10 earnings forecasts by – 1.5% to 1.1% to reflect improved ridership as well as higher energy costs, the cost of increased frequencies for trains and higher capex assumptions, which we had earlier underestimated. As a result, our DCF target price drops from S$1.93 to S$1.81 (unchanged WACC 9.3%; terminal growth 2%). Maintain Underperform.