SMRT submitted its application for fare adjustment to the Public Transport
Council (PTC) on 1 Aug 07.
SMRT continues to face cost pressures, with electricity cost increasing 26.3%
to S$39.8m, and a 3.8% rise in cost of diesel to S$35.5m, both for FY07. In
addition, SMRT annual earnings would be adversely affected by some S$11m
from the 2 ppt increase in GST and 1.5 ppt increase in employers’ CPF
contribution.
The PTC fare adjustment formula allows a maximum 1.8% fare hike this year.
We have assumed a fare hike of 1.5% for MRT and 2.0% for buses for FY08 in
our earnings model, which is consistent with the PTC formula. Our earnings
forecast remain unchanged.
Separately, SMRT announced that its wholly-owned subsidiary, SMRT
Engineering, will be appointed the operator of The Palm Monorail, the first
monorail to be constructed in the Middle East. This monorail is a Hitachi-based
system with a 5.45km fully elevated, double-tracked system with 4 stations.
Construction work is expected to be completed by Nov 08. Though this project
is expected to have only a small impact on SMRT financials, it will help SMRT
in its future bid to run other rail systems.
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.
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