SMRT Corporation Ltd: Sturdy 1QFY10 results

Sturdy 1QFY10 results. SMRT Corporation released a sturdy set of 1QFY10 results last Friday. Despite being impacted by fare-reduction package and smaller average hired-out taxi fleet, the group managed to maintain its revenue relatively flat (-0.0% YoY, -0.5% QoQ) at S$215.8m, thanks to higher train ridership, rental revenue and fees from overseas project. In addition, it enjoyed a 133.6% boost in other operating income of US$13.1m (one-off), jobs credit of S$4.4m and lower energy costs, which more than offset a hike in its staff and related costs, and repair and maintenance costs. As such, notwithstanding a muted topline, SMRT achieved a 19.6% YoY (+24.8% QoQ) growth in net profit to S$48.2m. We also observe that its LRT, bus and taxi businesses had, over the quarter, turned back into the black at the operating profit level, while both its train and rental businesses registered higher operating profits YoY. Only the advertising, and engineering and other services segments lagged, with operating profits down 9.8% YoY and 30.4% YoY, respectively. The quarterly results were within expectations, where revenue formed 23.8% of our sales estimate and net income 29.1% of our earnings projection.

Outlook on business segments. Looking ahead, SMRT has kept its cautious tone on the outlook, saying that its profitability is likely to be affected by continuing volatility in diesel prices, the fare reduction package and ramp-up costs for the progressive opening of the remaining Circle Line stations. For 2QFY10, particularly, the group expects lower revenue from its train, bus and advertising businesses, and higher operating expenses and electricity costs with the start of Circle Line Stage 3. Its taxi revenue is also expected to fall YoY, although its operating performance is likely to improve. Lastly, revenue from rental is projected to rise, contributed mainly by increased lettable space from the redevelopment of various stations.

Retain BUY. We have kept our FY10 sales and profit forecasts unchanged as the results and outlook were largely in line with our expectations. However, we now raise our DDM-derived fair value from S$1.81 to S$1.92 on marginally higher dividend assumptions (+3%) and lower cost of equity (from 6.5% to 6.4%). We believe SMRT has the capacity to grow its businesses both locally and overseas, and to manage its cost efficiently. While we have not factored in any contribution from Shenzhen Zona Transportation pending the completion of its acquisition, we think it is likely to provide further catalyst to its profitability and share price. Maintain BUY.

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