SMRT Corporation Ltd - May benefit from lower expectations (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price : S$1.785

Fair Value : S$2.04

CCL 4 & 5 to commence operations on 8 Oct. SMRT organized a preview of the stages four and five of the Circle Line (CCL) yesterday, which are slated to commence operations on 8 Oct. The addition of both stages will complete CCL (without CCL extension - target completion 1Q2012) and bring to fruition almost 10 years of patient anticipation since the awarding of the operating license to SMRT. Twelve new stations - stretching from HabourFront to Caldecott - will be available to commuters on the CCL, and will bring the total number of accessible stations to 28. Current average daily riderships are expected to increase from the 1QFY12's 180K/day and should hopefully hit close to LTA's estimated 400-500K/day within six to nine months. In terms of the number of trains in use, SMRT expects to utilize around 29-32 trains during peak hours (20 trains off-peak) with an average of 3.5 and 7 minutes headway respectively.

Increase in rental space & advertising opportunities. CCL will have available retail space of 3,150 sqm or 80 shops. Both stages four & five contribute a total of 868 sqm via three stations: Holland Village (596 sqm; 19 shops), one-north (248 sqm; 4 shops) and Botanic Gardens (24 sqm; one shop). With current occupancy levels at 90%, SMRT expects full take-up of the new retail space. In addition, anticipated high passenger traffic at stations like Buona Vista, Holland Village and HabourFront should enhance their advertising revenue as well.

Higher operating expenses still remain for FY12. Whilst news of full CCL operations provides temporary reprieve from otherwise negative publicity, SMRT is still expected to experience sustained cost pressures from higher operating (staff and energy) expenses in FY12 with anticipated profitability below FY11. Furthermore, with the six to nine month lead-time required to ramp-up and stabilize ridership levels, we continue to view CCL's operating profit contribution to be negative for FY12.

But SMRT may benefit from lower expectations. Wholesale electricity prices have somewhat stabilized over the past three months and could even move downwards given the poor macro-economic outlook. As SMRT has not entered into any fixed rate contracts, it could potentially benefit when wholesale electricity prices turn favourable. That said, most of the negative news and expectations have already been priced in by the market and the counter has lost 12.1% YTD. With a decent dividend yield (4.3% FY12F vs. 3.7% FY12F for STI), SMRT could surprise on the upside on any positive developments. As such, we maintain our BUY rating on valuation grounds, with an unchanged fair value estimate of S$2.04.