SMRT - Ridership figures could have a lag in the recovery in GDP

Weak start at Circle Line due to poor connectivity however mgmt expects impact to be minimal. SMRT average daily rail and bus ridership in Aug09 grew by 1.6% YoY and -1.2% YoY to 1.4m and 0.8m, respectively. The trend has been weaker than expected due to poor ridership at its core North East South West (NSEW) lines as a result of the slowing economy.

In addition, ridership at Circle Line (CCL) has been below our expectations of 55k in average daily ridership. Stripping out CCL ridership of more than 30k in average daily ridership, the core ridership at NSEW lines would have declined by 0.5% YoY. YTD SMRT's ridership for rail grew at 2.6% YoY and bus at -0.7% YoY.

Revised our ridership forecast downwards. We have revised our FY09E ridership forecasts for rail from 6.4% YoY to 3.5% YoY and bus from 0.8% YoY to -0.5% YoY. We have revised our earnings downwards by 2-3% in FY10-12E to account for the lower ridership in our forecasts partially offset by higher rental revenue assumptions (due to the redevelopment of five MRT stations), lower staff costs, lower depreciation and higher EBIT contribution from bus and taxi divisions.

Lowered our TP from S$2.05 to S$2.00; Buy. SMRT offers a defensive yield of 5.0%. Our revised target price is based on our DCF valuation using a COE of 7.5% and a TGR of 1.0%. Our S$2.00 TP implies a PE of 17.0x FY10E. Downside risks: rebound in the oil price, lower ridership, reduction in fares, taxi competition and disease outbreak.

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SMRT - HOLD with an adjusted fair value estimate of $1.89

Flat year-on-year revenue. The Group announced 1QFY10 revenue of $215.8 million, a decrease of $0.1 million compared to the same period last year showing signs that the fare reduction package has affected revenue streams from its train and bus segments. The Group also attributes the flat revenue to a smaller average hiredout fleet for taxis. Net profit showed a rise of 19.6% from $40.6 million in 1QFY09 to $48.2 million 1QFY10. There was an approximately $7.5 million rise in other operating income to $13.1 million, which seems like a one-off and when stripped, bottomline figures are flattish as well.

The MRT segment saw revenue at $115.6 million, a decrease of $0.03 million from 1QFY09. The growth in average daily ridership did partially offset the lower average fare for 1QFY10. Operating profit for MRT did increase by 8.0% to $36.7 million due mainly to higher operating income that was partially offset by higher repairs and maintenance as well as electricity costs. LRT revenue fell marginally to $2.2 million with an operating profit of $0.04 million.

Bus operations revenue for 1QFY10 fell 3.7% to $49.9 million due to lower average fares coupled with lower average daily ridership. It did however post an operating profit of $1.2 million due mainly to lower diesel cost, which is offset against lower revenue and higher repairs and maintenance expenses.

Taxi operations, due to a smaller average hired-out fleet, saw a decline in revenue by $1.2 million or 6.6% to $17.7 million in 1QFY10 compared to $18.9 million in the same period last year. A smaller average holding fleet allowed them to book an operating profit of $1.1 million due to lower other operating expenses.

Rental segment saw a rise in revenue by $1.6 million or 11.9% to $15.5 million compared to $13.8 million in 1QFY09. Operating profit increased by $1.4 million or 12.9% to $12.5 million. Increase in revenue and operating profit for the rental segment is mainly due to a better yield as well as increased rental space following the redevelopment of commercial spaces at various MRT stations.

Advertising revenue fell by $0.3 milion or 4.5% to $5.4 million attributable to the weak economic backdrop. Operating profit thus fell by $0.4 million to $3.5 million. Engineering and Other Services saw higher revenues of $10.6 million, which is $1.7 million above 1QFY09’s revenue. The increase was attributable to increased consultancy revenue and higher fees from overseas projects. Operating profit was however $0.6 million lower due mainly to lower taxi accident repairs.

Downgrade to HOLD with an adjusted fair value estimate of $1.89. It is evident that the fare reduction package introduced in April this year, which will last for the next 15 months from the 1st of April, has shown signs that it has taken its toll on SMRT’s train and bus revenues despite rising average daily ridership for the train segment. SMRT is expected to be facing headwinds in the coming periods due to the fare reduction package affecting train and bus revenue segments as well as the uncertain economic backdrop already affecting taxi operations and advertising revenues. We have adjusted some of our operating expenses as well as revenue segments to arrive at a slightly lower fair value estimate of S$1.89 (previously S$1.92). As this represents only an upside potential of 9.88% from the last traded price of $1.72, we are downgrading SMRT to a HOLD call with a fair value estimate of S$1.89.

SMRT: Riding firm

1Q10 slightly ahead. SMRT＊s 1Q10 net profit of S$48.2m (+20% yoy) was slightly ahead of our expectations due to a higher non-fare operating income (S$13.1m, +134% yoy). This arises from receipts for maintenance income and should not be sustained over 2Q - 4Q10. Revenue remained flat on fare reduction and a smaller taxi fleet, offset by higher rental and fees from overseas projects.

Ridership was resilient, rental revenue grew 12%. Average daily ridership for trains remained resilient, increasing by 4.8% yoy and 3.7% qoq to 1,431k/day. Average ridership for bus, however, dipped marginally (-1.1% yoy, -2.9% qoq) to 773.3k/day. Rental revenue drove topline, increasing 12% yoy to S$15.5m. Total lettable space increased to 28.799sqm (+9.7% yoy) due to the upgrading at 2 stations. Circle Line 3 ridership was at c.30k/day and not expected to be material till the full line opens around 2011.

Healthy balance sheet, net cash position. It will repay its current interest-bearing borrowings totaling S$150m in Dec＊09 (S$100m) and Jan'10 (S$50m).

Shenzhen Zona immaterial contribution. The proposed investment in Shenzhen Zona (RMB320m or S$68.4m) for a 49% stake should be completed in the next few months, but is not expected to have material contribution to the Group's bottomline. We estimate the contribution to be about 3-5% of the Group's net profit in FY11F.

Stable operations expected. Despite the downturn, MRT ridership remained resilient and tracks our full year assumption for 3% growth in FY10F. We maintain our Hold recommendation with a TP of S$1.65 based on 14x FY10F PE.

SMRT - Weaker than it looks

SMRT reported flat 1Q10 revenue compared to a year ago but net profit jumped 20% YoY vs our expectation of a slight decline, due mainly to a one-time, non-operating gain of $7.5m from a special train project and $4.4m in Jobs Credit Scheme benefits. Adjusted for these items, net profit fell 8% YoY to $36m. No dividend was announced for the quarter.

Train revenue was flat despite 5% higher ridership while Bus revenue fell 4% YoY due mainly to fare cuts from 1 Apr 2009. Taxi revenue fell almost 7% YoY due to a 12% reduction in fleet size. However, EBITDA margin improved 5%-points to 40% due mainly to lower fuel and electricity costs. Train profit was boosted by the non-operating gain, while Bus operations turned around to profitability on lower diesel costs.

Despite the recessionary environment, rental income continued to grow (+21% YoY, +11% QoQ), above management’s previous guidance of a flat performance for 2010. SMRT was able to keep rental rates steady as its high-traffic train stations continued to be preferred tenant locations, while improving lettable area – two additional stations were upgraded in 1Q10, with another five to be upgraded in 2Q10.

We continued to expect loss of revenue from fare cuts and transfer rebates as well as higher costs due to Circle Line to exceed Budget savings. So far, CCL ridership is below expectations (30,000 daily vs 45-55,000 targeted) and the opening of stages 1 and 2 in mid-2010 is still not expected to be enough for the line to break even. Shenzhen Zona, the first overseas M&A, has materialised but is not expected to contribute materially for 3-5 years.

Cost pressures point toward a cap on growth in the short term. With a double digit PE , we can only justify a Hold recommendation at this time. However, dividend yield is relatively decent at 5%, while CCL will be positive in the long run, with breakeven expected in 2012. Additional overseas M&A could also be a catalyst; SMRT has in fact recently hired a senior business development VP for Europe and China.

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.

SMRT Corporation Ltd - Deal revived for Shenzhen Zona investment

Further to announcements made on 30 Sep 08 and 23 Jan 09, SMRT has unveiled a new sale and purchase agreement to acquire from Shenzhen Zoto Investment a 49% equity interest in Shenzhen Zona Transportation Group, a leading land transport company in Shenzhen. The purchase consideration of Rmb320m (S$68.4m) will be satisfied by wholly-owned subsidiary, SMRT Hong Kong Limited, in US$ cash equivalent. When completed, the purchase will count as a significant overseas investment for SMRT. To recap, Zona owns 33.5% of one of only three bus operating companies in Shenzhen.

Zona operates public buses, charter and tourist buses, long-haul coaches and taxi services. It also offers car rental & leasing services, and motor vehicle repairs. Its fleet comprises 803 buses, 142 charter and tourist buses, 78 long-haul coaches, 830 taxis, and 260 leased cars in the Shenzhen region. The group comprises 10 subsidiaries and three associated companies. Following the acquisition, Zona will become an associated company of SMRT.

Another Chinese company, the National Express Transportation Group, holds the remaining 51% of Zona. National Express was the first road passenger transportation company to provide extensive intercity bus services in 67 cities in China. Its other businesses include car leasing & rental, and charter & tourist bus services. It also develops and operates bus terminals.

Profit guarantee. Should Zona fail to meet certain profit targets for FY2010 and FY2011, SMRT will be entitled to additional amounts of distributable profits in Zona, in addition to distributable profits proportionate to SMRT’s stake in Zona.

Purchase consideration. Based on audited consolidated accounts for the financial year ended 31 Dec 08, Shenzhen Zona’s net asset value is Rmb376.7m (S$80.5m), represented by negative net tangible assets of Rmb48.0m (S$10.3m) and net intangible assets of Rmb424.7m (S$90.7m). Net intangible assets comprise mainly taxi operating licences acquired through open bids.

Details remain scant. The completion of the deal is subject to the satisfaction of certain conditions, including approval from the relevant Chinese authorities. No information has been given on funding or valuation. However, we again highlight that the intangible asset portion of the deal at Rmb424.7m appears excessive, probably due to a short supply of taxi licences in China and hence the premium pricing. We believe the situation in China is probably similar to Singapore, where taxi operators need to bid for certificates of entitlement (COEs). Notably, the new purchase consideration is 25.6% lower than the previous agreement, although it also corresponds to a 22% lower net asset value.

Impact based on assumptions. Despite the lack of information, we view this acquisition positively, given the growth potential of China’s public transportation sector. We understand from SMRT that Zona is profitable. If we take the average ROA of SMRT (FY09 ROA 10.8%) and ComfortDelgro (FY08 ROA 6.0%) (i.e. 8.4%) and apply that to Zona’s net asset value of S$80.5m, Zona’s pretax profit may be in the region of S$6.8m. Equity accounting SMRT’s 49% stake would result in associate income of S$3.4m, or a positive impact of 1.8% on SMRT’s FY10 pretax profit.

Maintain Neutral. We are keeping our forecasts unchanged as the deal appears to have a limited impact on the group’s business in the near term. We maintain our DCF-derived target price of S$1.77 (WACC 9.6%). Dividend yield of 4.4% is mediocre and the stock is unlikely to outperform the market.

SMRT - 1QFY10 results preview

SMRT Corporation (SMRT) will be announcing results for the first quarter of FY10 after market closes on 31 Jul 09. A teleconference facilitated by the company will take place after the results announcement.

We are expecting SMRT to post stronger 1QFY10 results on a yoy basis, on maiden contributions from the Circle Line (CCL), as well as lower energy- and wage-related costs. For a more comprehensive operational update, please refer to our report “Still Worth Paying For” issued 8 July 09.

Maiden contribution from CCL. 1QFY10 will see the CCL contribute for the first time, as the first section of the line (CCL3) started operations in May 09. Ridership for CCL3 is at about 40,000/day at present. We expect ridership for the section to normalise at about 45,000/day, adding 14m to ridership in FY10.

Lower energy expenses. Electricity costs for usage spanning Apr-Sep 09 were contracted in Nov 08, when HSFO prices were significantly lower. We are expecting energy expenses to be 11% lower for the full year. Benefitting from the Jobs Credit Scheme. In spite of higher operational overheads related to the CCL on greater staff strength, we expect wagerelated expenses to be under control due to the Jobs Credit Scheme.

We have a BUY call on the stock with a DCF-derived target price of S$2.00 (cost of equity: 6.9%; terminal growth: 1%)

SMRT announces new S&P for 49% stake in Shenzhen Zona

This is a new SPA which is slightly different from the previous one signed in Sep 08. The latter which has since lapsed earlier in 2009 as certain conditions precedent were not met. The new SPA is also subject to certain conditions precedent, including receipt of approval from the relevant PRC authorities. Given that this is a second time a SPA is signed, we think the chance of it coming to fruition is likely.

Upon completion of the acquisition, Shenzhen Zona will be an associate of the company. As completion will take several months, the impact on SMRT's FY10F earnings will not be material. Assuming an acquisition PER of around 8x - 15x, which is similar to regional/global peers trading range, we estimate the profit contribution of this acquisition is around S$4.6m - S$8.6m (or 3%-5%) of SMRT's Group profit.

As of Dec 08, Shenzhen Zona has a NAV of RMB376.7m, represented by a negative NTA of RMB48m and Net Intangible Assets of RMB427.7m. The intangible assets largely comprise taxi operating licences acquired through open bids. The acquisition price works out to be around 1.7x P/NAV.

Shenzhen Zona is engaged in the following services:
， Taxi services in Shenzhen, car and bus repair services in Shenzhen and Huizhou,
， car leasing, scheduled coach services from Shenzhen to other cities, tour and chartered coach services within and beyond Shenzhen; and,
， public bus services in Huizhou.

Maintain Hold, TP of S$1.65

SMRT - Still Worth Paying For

Still worth paying for. SMRT Corporation (SMRT) has, over the last 18 months, been trading at about 23.5% over and above the sector average, based on the PE metric. Even on a P/B basis, the stock is not cheap, trading at 3.6x P/B (though this is largely due to its low fixed asset base). However, the stock is still worth paying for, given its strong margins that outshine that of sector peers, outstanding return on assets (ROA), sustainable dividend payouts based on solid earnings, and its ability to leverage on the Singapore growth narrative.

Growth potential not yet exhausted. We view SMRT as a play on Singapore’s growth trajectory, and the rail system as the biggest beneficiary of the government’s push to nudge commuters and peak hour traffic towards public transport. The rail system is, by far, the best alternative transport method to avoid congestion on roads.

Stronger operating performance than peers’. We compare SMRT and sector comparables and find that the company commands the highest margins and ROAs among listed land transport operators. SMRT also has the added silver spoon advantage of lower capex due to strong government support.

Maintain BUY; target price raised to S$2.00. We have lowered our profit forecasts (by between -5.1% and -6.3%) and changed our valuation methodology from PE to discounted cash flow. We value SMRT using the firm’s discounted free cash flow to equity at S$2.00/share (6.9% COE, 1% terminal growth). Our revised target price (up from S$1.86) gives a return of 17% over the last closing price of S$1.71.

SMRT - Purchase of Shenzhen transport company is long-term positive

SMRT’s S$68m purchase of Shenzhen Zona Transport gives the company a foothold in mainland China that should provide significant upside in the long term. However, although the deal is marginally positive, it won’t have any significant impact on medium-term earnings. Meanwhile, passenger numbers continue to grow on SMRT’s domestic rail business, as people choose cheaper travel, resulting in a highly defensible 5% yield. We maintain our Outperform call to a S$2.10 target.

Foothold on the mainland. SMRT (MRT SP - S$1.76 - O-PF) has entered in to asale-and-purchase agreement for the acquisition of a 49% stake in Shenzhen Zona Transport Group for S$68m. The deal should close by September 2009. Zona is currently engaged in taxi and public-bus services, as well as repair and maintenance, car leasing and tour coaches in Shenzhen and Huizhou. We see longer-term potential here through SMRT’s partner in this transaction, National Express Transportation Group, which is a state-linked company with a national franchise. This should provide SMRT with a platform for wider geographic growth in mainland China.

Marginal positive. The purchase price represents 1.7x FY08 PB of Shenzhen Zona and will be funded by all cash. SMRT has S$245m cash on its balance sheet. On completion, management says, the company will be earnings accretive from day one, which is an incremental positive. However. We expect earnings contribution to be less than 5% of the total for FY3/10.

SMRT - Defensive earnings amid slow economy

We initiate coverage of SMRT Corp Ltd (SMRT) with a BUY rating. Fair Value of S$2.11 presents a 19% upside to current price. We have applied a DCF approach to SMRT’s steady cash flows, with terminal growth at 1% and netting off S$1bil for the 30-year licence extension and transfer of assets for the new Circle Line.

Amid a slow economy, SMRT’s earnings are defensive with 80% revenue derived from the public transport fare business. We expect ridership growth on trains and buses to be supported, as costs of private vehicle usage continues to increase, while its rail and bus network continues to improve in terms of convenience (connectivity, shorter travel times and shorter headways) and affordability. We project 12% growth in mass rapid transport (MRT) ridership for SMRT to 572mil in FY10 and 9% to 623mil in FY11. This will offset average fare cut of 4.6% implemented from 1 April 2009 until end-June 2010.

With the progressive opening of SMRT’s new Circle Line - first phase having started in May 2009 with 2nd phase in 2010 and 3rd phase in 2011 - we would expect some new comers to public transport. But the impact will be some-what muted on incremental ridership as some rides on Circle Line may cannibalise rides from SMRT’s other two MRT lines. Early estimates put ridership on Circle Line’s first phase at 55,000 per day, rising to 0.5 million at a steady state upon full operations of the entire line.

Lacklustre taxi operations will be offset by growth in rental and engineering/other services segments. SMRT will continue to redevelop its MRT stations into lettable commercial space, which are in high demand for its location in high pedestrian traffic areas. So far, SMRT has renovated about half of its stations.

With oil prices off last year’s peak, SMRT stands to benefit as about 20% of its costs are energy-related items. As such we expect an improvement in EBITDA margins from 33% in FY09 to 34% in FY10. But we expect margins to revert to 33% in FY11 with increasing costs from further phases of the fully underground Circle Line.

Steady cash flows can comfortably support capex of S$150mil per annum for continual upgrading and expansion of transport fleet, station renovations and other system and service improvements. This leaves enough room to maintain DPS at 7.75 cents Singapore per annum. In addition, we estimate a potential for paying out a special dividend of 1.5 cents in FY11 if management wishes to.

SMRT - Circle Line operating performance may see upside

Circle Line ridership could surprise on the upside: The Circle Line (CCL) attracted a daily ridership of about 30,000 – 35,000 during its first week of operations since the 5-station, phase 3 of the 29-station lines opened in May 2009. This is better than our estimate of 25,000. The remaining phases will be opened from 2010. With the CCL being a “transfer line” cutting across the other lines, it should be able to capture a good amount of ridership share.

Might be net beneficiary of centralized bus planning: SMRT’s bus network currently spans the less densely populated areas of Singapore. The LTA is in the process of re-planning the whole bus network under its centralized bus planning exercise. SMRT could emerge a net beneficiary from this exercise, as routes get redistributed so that it could have a chance of securing the more lucrative bus services.

Retail space rental earnings could see slower growth: Retail space rental experienced phenomenal growth in the past on the back of aggressive refurbishment of existing stations and the conversion of bigger underground stations into “Xchanges” housing more retail shops. Going forward, we believe that the growth from this segment could plateau as the CCL is fully underground and the stations are smaller, translating to less lettable retail space. This segment currently contributes about 23% of SMRT's operating profits and is the second largest profit contributor after the core MRT business.

Valuation, risks: At 15.4x FY10E P/E, we believe the stock is fairly valued, trading above its historical mean forward P/E of 13.5x. Upside risks could come from the CCL breaking even faster than the FY 2013E in our assumption.

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.

SMRT - Results largely in line

Reiterate BUY rating at fair value estimate of S$1.92. The full year results for FY2009 announced recently were largely inline with our estimates. The Group produced relatively good results as well as a final dividend proposal of 6 cents per share. We have adjusted our operating expenses slightly thus our discounted free cash flow to equity model eased our fair value estimate to S$1.92 (previously S$1.97).

Growth delivered in earnings for FY2009. The Group announced growth in revenue of 9.6%, from S$808.12 million in FY2008 to S$878.95 million in FY2009; and registering growth in net profit after income tax of 8.5%, from S$149.94 million in FY2008 to S$162.73 million in FY2009 on the back of higher operating profits coupled with government budget measures. The Group attributes the growth in revenue to mainly higher train and bus ridership, higher rental and advertising revenue, increased consultancy revenue and higher project management fees. MRT ridership increased 8.7% to 510.2 million together with a full year ridership growth of 3.9% to 288 million for buses. The taxis segment however, suffered a full year operating loss due mainly to higher loss on disposal of taxis.

The rental segment achieved a growth of 37.0% from S$41.98 million in FY2008 to S$57.53 million in FY2009 due mainly to better yield and increased space following the redevelopment of commercial spaces at various MRT stations. Advertising revenue increased 13.8% from S$19.81 million in FY2008 to S$22.54 million in FY2009, mainly due to increased advertising on buses, taxis, trains and at MRT stations. Revenue from Engineering and Other Services increased as well. From S$23.54 million in FY2008 to S$36.46 million in FY2009 due mainly to increased consultancy revenue, higher diesel sales and higher project management fees from the Palm Jumeirah Project in Dubai.

Rise in operating expenses. The Group’s expenses increased by 11.2% from S$644.95 million to S$716.94 million. This was due to a rise in staff and related costs of S$13.9 million (5.3%) in FY2009, increase in depreciation by S$4.3 million (4.0%), higher repair and maintenances costs by S$3.1 million (5.0%), electricity and diesel costs increasing by S$29.1 million (32.4%) and an increase in other operating expenses by S$21.6 million (17.6%) in FY2009.

Circle Line Stage 3 commencing in May 2009. The rolling out of the circle line in May this year should seek to increase ridership further although we do also believe that this should lead to higher expenses in the coming first quarter 2010 due mainly to higher staff and related costs, as headcount is expected to increase for the circle line launch.

Final dividend proposed. The Board of Directors proposed a final ordinary dividend of 6.00 cent per share, totaling S$91.0 million. The final dividend, if approved, will bring the total dividend per share to 7.75 cents for the year.

SMRT's rising status as a landlord

Revenue growth from all segments except for taxi rentals. Top line revenue rose 9.6% yoy while net profit rose 8.5% to $163m but bottom line was boosted by S$4.6m income tax write-back. Excluding that, bottom line would have been broadly in line with ours and consensus forecast. A final dividend of 6 cents(one-tier tax exempt) was proposed, bringing total dividend payout to 7.75cents per share.

Taxi and LRT operations in the red but rentals profits grow 39%. Taxi operations did not break even in FY09,due to a loss on the disposal of taxis. similarly LRT operations did not break even, though losses were narrowed to just $0.2m. However rental revenue grew 37% due to redevelopment of commercial spaces at various MRT stations with operating profit growing at a slightly better 39%. Advertising revenue meanwhile contined to grow at 14%, suggesting that SMRT is gaining market share at the expense of traditional media. Engineering services grew 55% due to higher diesel sales and maiden project fees from Dubai.

FY10 will be see lower average ticket prices for railand bus operations due to previously announced fare reduction and rebates. We are forecasting a 4.6% reduction in average rail fares along with a 5.0% increase in rail traffic. Rental operations are expected to improve due to increase in lettable space while taxi operations was guided to be "challenging". We have a BUY recommendation on the stock with a $1.86 target price.

SMRT: As expected as train arrivals

4Q09 net profit $39m (+8% y-o-y). 4Q net profit of S$38.7m (+13% y-o-y, -6% q-o-q) was in line with expectations. Topline ended at $116.2m, up 4% y-o-y. For full year, revenue and net profit ended at $879m (+10%) and $163m (+9%), respectively. Its MRT, rental and advertising continued to be the main contributors to its operating profit. Bus division was affected by higher diesel costs and maintenance, while losses at Taxi division was due to lower hired out rate and losses on disposals.

Final dividend of 6.0 cents. A final dividend of 6.0 cents was proposed, bringing total dividends to 7.75 cents for the full year. This equates to a payout of 72% of PATMI. Book closure date is 30 Jul 09.

Outlook. Train ridership for FY09 was up 9% to 510.2m rides. We expect ridership to remain relatively firm, albeit growing at a slower pace. We are assuming a 3% and 1% growth for its train and bus ridership in FY10F respectively. Rental should continue to see growth, albeit slower, on higher lettable space. Advertising should be affected by the slower economy.

Maintain Hold, TP: S$1.65. We maintain our Hold recommendation, TP: S$1.65 still based on 14x FY10F PER (mid-trading range). Our forecasts are trimmed slightly by 3-4% largely on a lower ridership growth. We believe the stable operations, relatively resilient business model and a 5% yield should provide support to the share price.

SMRT - FY09 results in line, dividend maintained

FY09 results in line, DPS maintained: FY09 earnings came in at $162.7MM (+8.5% Y/Y). A final DPS of 6 cents was declared, bringing full year DPS to 7.75 cents. This is the same as FY08. As a result, payout ratio decreased to 72% from 78%, against a minimum payout ratio of 60%.

MRT ridership grew 8.7% in FY09 against 7.9% in FY08. However, management guided that lower growth should be expected in ridership in FY10. Coupled with the reduction in fares from 1 April onwards, 1Q10 MRT revenue is expected to be lower Y/Y. Circle Line Stage 3 will commence operations in May 2009. Management expects CCL to be loss-making until all the stages are opened from 2010. We estimate CCL to break even only from FY2012 (2H CY2011 onwards).

Buses and taxis ended the year in the red: While full year bus ridership was up 3.9%, the segment ended the year with a $4.5MM operating loss although it turned around with a slight operating profit of $0.8MM in 4Q09. Taxis’ losses deepened to $6.3MM due to lower hired-out rate and disposal losses of taxis. Management expects the performance of the taxi business to recover in FY10.

Risks of losing tenants remains low: Rental revenue and operating profit was up 37% and 39% Y/Y, respectively. Management highlighted that it has not seen pressure on rental rates due to the strong human traffic in its MRT stations in line with ridership growth. Recent rental renewals were in fact at marginally higher rental rates. Tenancy contracts generally last 3 years. However, CCL Stage 3 does not add meaningfully to new lettable space and being all underground stations, CCL will also have relatively less rental space than the above-ground MRT lines.

Maintain Neutral: We trimmed our earnings forecast for FY10/FY11 by 4%/5% as we reduce our ridership growth assumption for MRT from 8% to 7% as well as factored in potentially higher idle rate for SMRT's taxis due to increasing competition from other taxi operators. We also maintain our DCF-based Dec-09 PT of S$1.80.

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.

SMRT - Inside track for incessant growth

Key beneficiary of Singapore's LT Master Plan. We believe SMRT, as one of the key public transport operators in Singapore, is well primed for the opportunities created by the Land Transport (LT) Master Plan. Under this new road map, Singapore will see sweeping changes to its entire spectrum of transportation services in the coming years. As it is part of the Land Transport Authority's (LTA) main strategic thrusts to make public transport a choice mode of transport for its population, and rail network the backbone of Singapore's public transport system, we believe SMRT is likely to benefit from the better connectivity and stronger ridership.

Likely to maintain 60% dividend payout ratio. We also see a strong case in SMRT's ability to uphold its profitability and dividend payout going forward. By looking at the time-series trend analysis of its operating costs breakdown, we observe that the electricity and diesel costs have been growing at an accelerated pace over the years, thereby contributing to a larger percentage of the costs. However, with the US real GDP projected to decline by 2.8% in 2009 and the global real GDP to fall by 0.8%, according to EIA, this is likely to keep the domestic consumption for all major fuels and their accompanying prices at low levels. Therefore, while we acknowledge that SMRT is likely to be burdened by higher labour costs following the commencement of the Circle Line, a higher expected ridership, coupled with lower percentage electricity and diesel costs, are likely to enable the group to uphold its profitability and dividend payout.

Initiating with BUY. We like SMRT for its defensive nature, consistently strong dividend payouts and strong operating cash flows. While the group is currently trading at a 18.8% premium to its Singapore-listed land transport peers' current PER, we feel that it is undemanding given its superior earnings margin of 18.7%, ROE of 22.8% and dividend yield of 5.0%. For FY08-12, we expect the group to register an EPS CAGR of 6.6%, thanks to a continued increase in ridership, higher rental and advertising revenue and expanded engineering services. We initiate coverage on SMRT with a BUY rating and S$1.83 fair value, based on two-stage Dividend Discount Model (DDM) valuation methodology. Our fair value implies a 17.3% upside potential and at 16.9x FY10F EPS, which is still slightly lower than 17.4x average PER seen in 2008. Key risks include exposure to volatile energy costs and compliance to performance standards set in its License & Operating Agreement.

SMRT limited downside

SMRT, one of new inclusions into the STI basket from 23 March 2009, is also one of the more defensive stocks, and should remain resilient in the medium term even if the overall market continues to underperform. In the short-term, we are still looking for opportunities to buy in on any dips that may occur.

SMRT has shown itself to be a very defensive stock in this current economic crisis – the stock has only suffered a 20% erosion in value as compared to the near-60% loss suffered by the Straits Times Index (STI) since its all time high in Oct ‘07.

In addition, we note that SMRT has managed to maintain its 5-year uptrend line since its all-time low in 2003, despite the general market’s dismal performance over the same period.

Near Term Outlook; Range trading likely

- As the overall market is currently undergoing a technical rebound (which we expect to persist for a while more), more defensive stocks like SMRT may be discarded in favour of more speculative counters.

- Both the price action (candlesticks) and short-term indicators point to more downside bias as well.

- But the inclusion of SMRT as an STI component stock is likely to limit the downside risk.

- As such, we expect the counter to find strong support level at $1.55 (6.5-month downtrend-turned-support line and also recent troughs) before rebounding to test the 100-day MA and upper Bollinger band again at around $1.63.

Medium Term Outlook; Well supported levels with limited downside

- The recent rebounds off the $1.55 level seem to illustrate that it is a strong medium-term support as well.

- Meanwhile, the technical indicators also underline the positive medium-term view.

- The OBV indicator is still on a 5-month uptrend; the MACD indicator tends to cut back up just below the centre line; the RSI also tends to turn up soon after it reaches the oversold level.

- Although SMRT has failed to recapture the 4.5-month uptrend-turned-resistance line recently, we believe that the medium-term downside remains limited as long as the general market continues to underperform.

Support / Resistance Levels

- Should the immediate support at $1.55 (recent lows) be breached, we expect the medium-term support level to hold at $1.42 (Oct ’08 low).

- Any further upside from the $1.63 level will likely meet heavier resistance at $1.67 (Feb ’09 high and 6-month downtrend line), followed by $1.79 (Dec ’08 high).

- The strongest topside cap is likely at S$2.00.