SMRT - 1QFY08 : Earnings expansion driven by ridership growth

SMRT reported 1QFY08 net profit of S$37.9m, up 38.5% yoy. Revenue was up
7.8% yoy.
Revenue was up 7.8% yoy to S$194.2m. The S$14m yoy rise in revenue was
primarily driven by MRT operations, which recorded a S$8.9m or 9.1% revenue
rise to S$106.8m - MRT average daily ridership was up 6.9% yoy to 1.23m.
Rental revenue from commercial spaces rose a sharp 18.4% yoy as a result of
better yield following the redevelopment of retail space at various MRT stations.
Advertising revenue surged 43.8% yoy due to increased advertising on trains,
stations and buses. Taxi operations also recorded a respectable 11.4% yoy
revenue increase.
Operating profit rose 27.6% or S$9.7m yoy to S$44.6m. This was due to a)
MRT operations operating profit rising S$3.7m (or 13%) yoy; b) taxi operating
losses falling from S$3.2m in 1QFY07 to S$0.3m; and c) improvements in rental
and advertising operating profit.
Positive outlook for revenue going ahead. SMRT expects a yoy ridership
increase going forward. The consequent higher fare revenue will be partly
negated by the 2 ppt increase in GST effective 1 Jul 07. Revenue from taxi is
also expected to rise due to a larger average hired-out fleet. SMRT management
expects to record S$8m retail space rental revenue increase for FY08.
However, expenses are expected to be higher due to more scheduled repairs
and maintenance and increase in employers’ CPF contribution by 1.5 ppt
effective 1 Jul 07.
Earnings forecasts raised marginally. We have raised our FY08 net profit
forecast by 11% to S$131.1m, to reflect the anticipated stronger FY08 ridership
figures for MRT, LRT and buses.
Our target price for SMRT is S$2.10. This comprises the following: a) S$1.55
for existing operations (which has factored in cannibalisation from the 2010
commencement of Circle Line operation), b) S$0.17 for the Circle Line, and c)
S$0.38 value enhancement assuming the land transport review will lead to one
operator running all rail and bus operations in Singapore. If the land transport
review leads to a model of one-rail operator and one-bus operator, then S$1.91
would be a fairer value. While the market continues to speculate on the
recommendations of the land transport review, we believe the bullish sentiment
could bring SMRT’s share price closer to our more optimistic valuation.