SMRT Corporation Ltd (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price : S$1.87

Fair Value : S$2.04

1Q revenue growth likely to be minimal. SMRT's 1QFY12 revenue growth over the previous quarter is likely to be minimal despite increases in MRT and bus ridership for the first two months of the quarter as compared to 4QFY11. Extrapolating the ridership statistics for the quarter, we anticipate an increase in ridership of about 5% QoQ for MRT and 4% QoQ for bus services, but believe that the lower average fares resulting from the implementation of distance-based fares will negate these ridership improvements and limit revenue growth to only around 1% QoQ. Furthermore, the general increase of wholesale electricity prices over the same period and the upsurge in staff and related costs after the completion of additional staff recruitments for Stages 4 and 5 on the Circle Line during the last quarter will put a squeeze on 1Q11 operating profits.

Challenging operating environment remains. As SMRT's 1QFY12 comes to a close, we expect cost pressures to persist with revenue growth being unable to keep pace with operating expenses. We maintain our view that operating losses from the Circle Line will continue due to the lack of optimal ridership levels and higher staff costs, and may persist even after the completion and full operation of the Circle Line in Oct 2011. The higher electricity and diesel costs experienced earlier during the year will also continue to bite and augment expenses. Although cost prices have since come off from earlier highs, they remain elevated at current levels compared to previous quarters. In terms of revenue growth, modification of fares seem unlikely this year even with increases in the consumer price index and average wages, which are the two main components in the fare adjustment formula. Given the general sensitivity of the population towards price increases, we believe that any fare hike decision will only take place towards the end of the year at the earliest.

Lack of growth catalysts, maintain HOLD. Since our last update issued on 3 May 2011, SMRT's share price has hovered around S$1.86-S$1.92. We feel that these range-bound movements reflect the incorporation of the above-mentioned factors by the market as well as the general bearish mood over the recovery strength of the global economy by investors although prices have been supported by its relatively decent dividend yield of about 4.5%. As such, any immediate catalyst for improvement in its stock performance will have to come externally, from improvements in the general sentiment of investors over the global economic situation. In light of the anticipated mediocre 1Q results, we have revised our previous fair value estimate of S$2.07 down to S$2.04 and maintain our HOLD rating.