SMRT: Disappointing quarter on the back of higher opex (DMG)

(NEUTRAL, S$1.88, TP S$1.73)

Results below expectation. SMRT’s 1QFY12 PATMI fell 8.9% YoY to S$34.8m (+2.3% QoQ) despite 7.5% YoY rise in revenue to S$253m (+3.5% QoQ). Main reasons for the disappointment are 1) higher electricity and diesel costs, 2) higher other opex which comprises of cost of diesel sold to taxi drivers, and insurance costs, and 3) negligible sequential growth in Circle Line (CCL) ridership (est CCL Stage 1-3 ridership: ~181k/day, same as 4QFY11). In view of the disappointing results, we raised our opex assumption, mainly electricity and diesel costs by 7-8%. Consequently, our FY12-13 PATMI are reduced by 7.5-6.2% respectively. Our TP is subsequently lowered to S$1.73 based on DCF (WACC: 8.0%; Terminal rate: 1.0%). Maintain NEUTRAL.

Bus and MRT segments hit by high diesel and electricity costs. Operating loss at SMRT’s bus division widened to S$4.4m in 1QFY12 mainly due to 1) higher diesel costs, and 2) higher depreciation, partially offset by 3) higher revenue. We expect SMRT’s bus division to remain in the red in the next few quarters due to 1) high diesel price, and 2) lack of economies of scale at SMRT’s bus division. Meanwhile, EBIT margin of MRT division has dropped to 28% in 1QFY12 (-5.9ppt YoY; -3.0ppt QoQ) on the back of higher electricity cost of S$27m (+33% YoY; +40.5% QoQ). Management intends to hedge the electricity and diesel requirement once there are favourable rates. Currently, SMRT has not hedged any of its diesel and electricity requirements.

CCL Stage 1-3 ridership growth was flat sequentially. Whilst there was no published number on CCL Stage 1-3 ridership in 1QFY12, management indicated that the growth was flat QoQ, which implies that CCL Stage 1-3 ridership is ~181k/day. This comes as a major disappointment to us as our previous estimation has shown that CCL Stage 1-3 requires breakeven ridership of ~223k/day. We think the opening of CCL Stage 4-5 will hasten the ridership growth for the full CCL which is estimated to require breakeven ridership of ~450k/day (exclude CCL Marina Bay extension).