SMRT Corporation - Challenging operating environment (KimEng)

Event

 SMRT’s 1QFY Mar12 results came in below expectations. Despite an increase in train and bus ridership, as well as taxi revenue, flat Circle Line (CCL) ridership and a huge spike in fuel and staff costs badly damaged profit margins and dented net profit by 9% YoY. With SMRT leaving electricity and diesel unhedged, the opening of CCL Stages 4 and 5 in October could push these costs up by another 4‐5%. Key uncertainties include the award of the Downtown Line contract, which may not be viewed positively by the market, and future debt fundraising for the planned capex of $600m this year. Maintain HOLD.

Our View

 Higher train and bus revenue notwithstanding, topline growth lagged ridership growth due to lower average fares following the advent of the distance‐based fare system in July last year. Particularly disappointing was the fact that daily CCL ridership stayed flat QoQ at about 181,000 passengers, an unexpected development that saw CCL losses widened from 4QFY Mar11.

 Profitability was badly hit by a surge in electricity and diesel costs that weighed on train profits and widened bus losses. SMRT did not hedge its electricity and diesel needs during the quarter as prices were too volatile. Margin pressure is likely to worsen in future quarters as the opening of CCL Stages 4 and 5 in October will bump up electricity consumption further.

 No growth catalysts are in sight. The Downtown Line operating contract is expected to be awarded in 3Q11. If SMRT wins the bid, investors may not view this positively given CCL’s poor performance to‐date. Further, SMRT is likely to tap the medium term note market to raise funds for the planned $600m in capex this year. We estimate this will push the company from net cash to 0.3x gearing.

Action & Recommendation

We maintain our HOLD call in the light of the challenging operating environment. However, dividend yields are fairly decent at 4‐5%.