SMRT Corporation : 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 incentivesto 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.

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