SMRT Corporation Ltd - Lower energy costs expected in 2Q12 (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price : S$1.81

Fair Value : S$2.04

2Q earnings preview. SMRT is due to announce its 2Q12 results before the end of the month. As a recap, its 1Q12 earnings had been impacted by higher operating expenses, which led to a squeeze on gross profit and EBITDA margins. Staff costs were elevated on a YoY basis due to the increase in headcount for Circle Line (CCL) operations while higher energy tariffs raised electricity and diesel costs as well.

Modest revenue growth with reprieve in energy costs. Our 2Q12 forecasts have called for a modest 4.9% YoY (+2.0% QoQ) increase in revenue to S$258m on the back of increased MRT and bus riderships. While operating margins will continue to remain under pressure from the higher staff costs and energy costs on a YoY basis, we are anticipating an improvement over 1Q12 performance due to the softening of electricity prices over the past three months after energy prices came off on poorer macro-economic growth projections. In addition, SMRT's staff force has stabilized in the previous quarter ahead of full CCL operations and no significant increases in headcount are expected. That said, a net margin of around 17.7% for 2Q12 is possible in our view, a better showing when compared to 1Q12's net margin of 14.2%.

Still some potential kinks in CCL. Full operations of the CCL commenced on 8 Oct to much fanfare and publicity. However, preliminary feedback from commuters have been somewhat negative with common complaints mostly about lengthy wait times and congested train carriages during peak hour travels. Although ridership patterns will require more time (approximately six to nine months) before becoming more certain, SMRT could potentially increase the number of train runs in order to accommodate the demands for greater travel efficiency, which would in turn increase their operating costs vis-à-vis electricity costs. Currently, SMRT is expecting to utilize around 29-32 trains during peak hours (20 trains offpeak) with an average of 3.5 and 7-minute headway respectively.

Ridership levels to receive boost from curbing of vehicle growth rates. Transport Minister Lui Tuck Yew recently revealed plans to reduce the vehicle growth rate from its current 1.5%/year over the next three years. Coupled with possible adjustments to the Electronic Road Pricing (ERP) system, car ownership will likely become more expensive, resulting in more taking public transport. With other railway lines in the pipeline i.e. Thomson and Eastern Region Lines, the higher connectivity should provide growth catalysts for SMRT's ridership levels.

Maintain BUY. With a decent dividend yield (4.3% FY12F vs. 3.6% FY12F for STI), we maintain BUY with an unchanged fair value of S$2.04.