SMRT Corporation Ltd- Disappointment from the fare review (POEMS)

Hold (Maintained)

Closing Price S$1.795

Target Price S$2.06 (+14.8%)

• Lower than expected fare adjustment

• Travel Demand Management Schemes to lower rail revenue for SMRT

• Revised earnings estimates down by 2-3% for FY12/13E

• Maintain Hold with revised target price of S$2.06

Fare adjustment of +1.0% is below our expectations of +2.0%

The transport operators applied for the maximum allowable increase of 2.8% in average fares, but the Public Transport Council (PTC) only approved an increase of 1.0% after considering various factors. This increase is also below our expectations of a 2.0% increase.

Travel Demand Management Schemes to cost SMRT S$5mn

Apart from the smaller than expected increase in average fares, SMRT also embarked on a “Travel Demand Management Scheme” that is expected to cost them S$5mn. SMRT will offer a bigger discount of 30cents (vs 10cents previously) to incentivize commuters to travel outside of the peak travel hours. Success of these schemes would result in lower rail revenue for SMRT.

Lower than expected revenue growth insufficient to offset higher operating expenses

Operating costs had been on the rise due to higher energy and staff expenses and we expect these cost pressures to intensify following the full opening of Circle Line (CCL) in October. This would likely reduce profitability of the Rail and Bus even further.

Valuation

We used a blended valuation model of DCF (COE: 7.2%, terminal g: 1%) and P/E (18.0X FY12e PATMI) to arrive at our target price of S$2.06 and expect a total return of 19.6% after incorporating a dividend yield of 4.7%. While SMRT’s expected total return exceeds our threshold of 15%, we expect the market to focus on the decline in earnings and disappointment from the fare review in the near term. Hence, we stay neutral and maintain our Hold recommendation on SMRT.