SMRT - Savings from the Budget & energy costs

SMRT will report FY09 results on 24 Apr. We expect a relatively weak operational quarter in 4Q09 as ridership was weak for both trains and buses. Train and bus ridership in Jan-Feb 2009 rose 1.5% and fell 1.3% yoy respectively, compared to 8-13% growth in the past four quarters for train ridership and 4-6% growth for bus ridership. Our full year profit forecast is $157.7m, suggesting 4Q net profit of $33.7m (-1.5% yoy).

However, there could be upside from 2009 Budget corporate goodies such as the Jobs Credit Scheme (which we have not factored in) as well as savings on energy costs. Specifically, the loss on its diesel fuel hedge should be smaller in 4Q compared to 3Q ($2m loss) as diesel prices likely rose sequentially in 4Q. Energy cost savings should benefit SMRT more in FY10 as the fuel hedge expired at end-Mar while electricity prices are set to fall from Apr onward.

Train and bus ridership fell sharply in Jan 2009, likely due to an unusually high monthly base in the previous year. Overall, the upward trend of the past few years appears to flattening due to the recession but we expect ridership to sustain low single digit growth in FY10, as people will still prefer public transport in bad times and Circle Line Stage 3 should boost ridership once it comes onstream at the end of May.

The Australian media reported last week that SMRT has partnered with Vibrant, a consortium between Veolia and Bombardier that is bidding to operate the Melbourne metropolitan train network. If the bid is successful (outcome reportedly will be known by mid-2009), the services to be supplied by SMRT (rail asset management, customer experience, systems and infrastructure development and business management systems) will be worth A$5m a year.

We expect overseas M&A to be a potential catalyst for SMRT. However, the dealflow so far has been small or delayed (e.g. Shenzhen Zona). At this point, we prefer ComfortDelgro to SMRT.

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