SMRT Corporation: 1QFY12 results within expectations (OCBC)

1Q results within expectations. SMRT's 1Q12 revenue came in within 2% of our forecasts as it grew 7.5% YoY (+3.5% QoQ) to S$253.1m; this on the back of higher MRT and bus ridership of 8% and 7% YoY respectively - albeit at lower average fares YoY due to the implementation of distance fares - and increases in external fleet maintenance revenue (+54.2% YoY). However, EBITDA fell 5.4% YoY (+1.7% QoQ) due to larger staff related costs and the surge in fuel prices over the past year. As a result, overall net profit was lower by 8.9% YoY (+2.3% QoQ) at S$34.8m, which was also within 2% of our forecast. On its balance sheet front, SMRT continues to maintain a net cash position with a 9.3% YoY increase to S$411.2m.

Higher operating expenditure continues to squeeze margins. In terms of gross profit and EBITDA margins on the group level, margins fell by 2.1 and 3.9 percentage points respectively. Staff costs remained elevated (+11.0% YoY) after the increase in headcount for Circle Line (CCL) operations, higher CPF contributions and the absence of jobs credit, while the higher average tariffs pushed electricity and diesel costs up (+32.5% YoY). Consequently, most of its various segments experienced declines in operating margins with bus operations the worst hit as its losses increased more than four times to S$4.36m. Rental (+10.9% YoY) and engineering and other services (+412.3% YoY) segments were the only exceptions.

Challenging operating environment ahead. Going forward, SMRT warns that its FY12 profitability may not be maintained at FY11's level (16.6% net margin) as it expects cost pressures from higher staff and energy expenses to remain. In addition, higher operating expenses are anticipated upon commencement of CCL operations from Oct this year. We concur with management's assessment on the cost front, and as mentioned in our previous reports, we view CCL's operating profit contribution this year to be negative. Current daily ridership levels are at a distant 37% of its full estimate, we deem any upside to be limited at least for FY12. As for its application to raise fares by 2.8%, we do not expect the Public Transport Council (PTC) to approve the full amount and anticipate a marginal increase on the low end of the 1-1.5% range.

Some bright spots remain, maintain HOLD. While bottom-line growth from train and bus operations looks sluggish, we do see some offsetting effects from increases in rental revenue (management forecast: +S$7m for FY12) and operating profits following the redevelopment of various MRT stations (e.g. Jurong East). As the 1Q results were in line with our forecasts, we leave our FY12 estimates unchanged, and maintain our HOLD rating with an unrevised fair value estimate of S$2.04.