1H06 results in line with expectations : Maintain Buy

1H06 results were within expectations. Higher fare and non-fare revenues helped lift core operating earnings 15% y-o-y to S$68.5m despite higher fuel costs. Moving forward, we expect the Group’s operating results to continue to improve, which could underpin higher dividends. SMRT declared gross interim dividends of 1.5cts per share (1H05: 1.5cts). At current price, SMRT’s valuation is attractive – offering a prospective net yield of 5.6%. We maintain our BUY recommendation and target price of S$1.20, based on a target yield of 5% for FYE Mar 2007.

Stable fare-based business. SMRT generated majority of its revenue from fare-based MRT and Bus operations. These 2 segments contributed 80.7%, 79.2% and 78.7% of total turnover in FY03, FY04 and FY05 respectively. As train ridership is closely related to, if not reliant on, the size of the Singapore population, and Singapore aims to have an eventual population of 5.5 million in the next 40 to 50 years, which translates to a CAGR of 0.6%, the population growth will likely increase the train ridership in the long run. Besides, the growing labor force, low unemployment rate, and increasing tourist arrivals will likely contribute positively to train ridership. SMRT’s announcement of fare increase in June 2005 will also boost the average fare for MRT and Bus by approximately 2% each respectively. We expect the MRT revenue to improve in FY06, and Bus revenue to be largely flat due to the schedule and route rationalization leading to a drop in ridership. The Circle Line and Downtown Extention will also contribute to the top line upon completion by 2010 and 2012.

Growing non-fare business. SMRT is growing its non-fare business such as commercial space development and advertising, and we view it as an important move SMRT takes to unlock the hidden value in its business. Due to the high traffic flow, reasonable rental and good locations, shops and advertising at MRT stations have gained popularity among tenants and advertisers, as indicated by SMRT’s 1H FY06 rental and advertising income that increased by 32% and 24% yoy respectively. For SMRT, both business segments are characterized by low cost, high return. As SMRT still has a pool of more than 40 MRT stations, and the Circle Line, upon completion by 2010, would increase the number of MRT stations by 50% from 51 to 77, this gives room for SMRT to scale up its commercial space development and advertising business.

Taxi industry remains competitive. The liberalization of the taxi industry in Singapore in June 2004 enabled SMRT to expand its taxi fleet size over the past one year. SMRT operates Singapore’s second largest taxi fleet with 3,005 taxis as at the end of September 2005, and captures an estimated market share of 15%. The tough competition in Singapore taxi industry may put pressure on SMRT’s taxi operations. There are another 5 taxi operators in Singapore, including the largest taxi operator ComfortDelGro that has a fleet of over 16,000 taxis. The recent move by some taxi operators to offer higher cash incentives to taxi drivers has partly contributed to some decline in SMRT’s taxi hire-out rate. The industry is also experiencing an exit of some taxi drivers as a result of higher diesel prices that have increased their operating costs. However, SMRT’s "Taxis Revenue Sharing Hire Scheme" may help mitigate the impact of lower hired-out rate, as the scheme has features that are attractive to older drivers and new entrants, while utilizing the idle lower-yield cabs.

Overseas expansion is at early stage. SMRT has a track record in providing good transportation services to the public in Singapore. When benchmarked against 2 global groups of metro operators, including those in New York, Paris, London, Tokyo and Hong Kong, SMRT is among the top performers in terms of punctuality, cost and manpower efficiencies, and safety. Recently SMRT announced its participation in the Singapore Land Transport Consortium to explore opportunities in land transportation infrastructure and services in China, India, the Middle East and Southeast Asia. We believe that SMRT is in a better position to expand overseas now, but it takes time for us to see the fruits of the overseas expansion.

Good dividend yield. SMRT has been consistent in paying out dividends to reward shareholders. SMRT had declared gross dividends of 3.08 cents, 4.5 cents and 6.5 cents for FY03, FY04, and FY05 respectively. Based on the last closing price of S$1.02, net dividend yield works to 5.1%, which looks attractive among Singapore’s dividend yielding stocks. SMRT’s cash generative business leads us to believe that the current gross DPS of 6.5 cents should be sustainable. Upside may come when SMRT’s non-fare business such as commercial space rental and advertising pick up, or fare-based business sees more growth.

Potential risks: downward adjustment of fares, fluctuating energy cost, slow down in the economy, sluggish consumer demand, rising interest rate that makes the yield unattractive, etc.

Recommend HOLD with fair value at S$1.16. We are projecting SMRT’s core net profit to grow at 3-year CAGR of 7.3%, the adjusted net operating cash flow to grow at a moderate 3-year CAGR of 1.2%, and the ROE to maintain at least at 15%. We have assumed a higher diesel cost and tax expense in FY06 and FY07. Our forecasts may need to be revised should the diesel cost or tax expense turns out to be different from assumptions. By using 8% discount rate and 0% terminal growth rate, we derive a fair value of S$1.16. The fair value translates to 18.7x FY06 P/E, 17.0x FY07 P/E, and 3.0x FY06 P/BV. As there is less than 15% upside from the last closing price, we initiate coverage recommending HOLD. However, SMRT may be a good stock for long-term investors looking for dividend yields supported by low risk and strong business fundamentals.

Extracts fm DBSVickers Report dated 19-Oct-05,

Attractive level to accumulate

SMRT’s core operating performance is expected to improve, led by increases in fare and non-fare revenue streams that should more than offset higher fuel costs. With improving operating results, there is potential for dividends to be raised from last year’s gross payout of 6.5cts per share, to 7cts in FY06 and 7.5cts in FY07. This works out to a high but sustainable payout ratio of 86-87% of earnings. The share price has weakened by 14% since 1 Aug, and SMRT’s valuations are now more attractive – offering a prospective net yield of 5.4%. We upgrade our recommendation to BUY with a target price of S$1.20.

• 1H06 results preview. We expect fare revenue to be lifted by both improving ridership number and the rate hikes that came into effect on 1 Jul. Non-fare revenue should also benefit from higher rental yields and advertising income. Excluding impairment losses of goodwill of S$21.4m in 2Q05, we expect 1H06 operating profit to improve by c. 10% y-o-y.
  
• Improving operating earnings could support higher dividends. We are confident of the Group’s improving operating numbers going forward. The higher fares should help to lift fare revenue and margins. Ridership, which for the first six months of FY06 has grown 2.7% y-o-y (against our forecast of 2%), is also growing modestly with the improving economy. SMRT can also look forward to better rental yields as it completes facelifts for more of its stations. However, we lowered our numbers marginally to account for lower taxi earnings due to increasing competition. Despite this, we are maintaining our assumption that SMRT would raise gross dividend payout by 0.5cts each year for FY06F and FY07F. This works out to a high but sustainable payout ratio of 86-87% of earnings.
  
• Upgrade to BUY as share price has weakened 14% since 1Q06 results. We believe that the recent weakness in SMRT’s share price presents a good opportunity to accumulate the stock. There is limited downside from this level as investors are assured of at least 6.5cts gross DPS, with potential for more as the Group’s operating results improve. Our 12-month target price of S$1.20 is based on a target yield of 5% for FY07, which is supported by a DCF-based fair value for SMRT of S$1.19.

SINGAPORE : Two diversified transport companies are taking two very different routes towards growing their businesses.

SMRT appears homebound, with its focus on the Singapore market while Comfort Delgro is creating a global footprint. While most market-watchers would pick ComfortDelgro as a long-term growth stock, some say it is SMRT that appears to be the more attractive of the two -- but only for the near-term.

High oil prices are eating into the profit margins at both ComfortDelgro and SMRT.

Some market watchers say SMRT appears to be coping better because its mainstay rail operations run on electricity. It is also pushing strongly to increase its non-fare revenue, by growing its taxi business and improving rental yields at its MRT stations. They say the rail-operator could see improved operating performance over the next 2 to 3 years.

But after that, SMRT's future is not so bright.

Said Kevin Scully, managing director at NetResearch Asia, "It's basically a long-term play on the organic growth in the MRT system, and the population. So you can expect very modest single digit earnings growth in the long-term. Because it's a very mature market, they have actually committed to pay a large amount of their earnings as a dividend." Local brokerage house DBS Vickers expects SMRT to raise its dividend payout ratio to about 84 percent in the next two years. But it downgraded its call on the counter to 'hold' from 'buy', saying that the higher dividend payout has already been factored into the stock price.

As for ComfortDelgro, it sees the stock as fully-valued, for now.

Still market watchers say the counter holds tremendous long-term potential. Said Mr Scully, "It will be a bit like SingTel. If you look at SingTel, probably five, six years ago, 70 percent, 80 percent of their earnings was from Singapore. Today, it's less than 30. Over time, I would expect a similar evolution." He added, "They have gone to UK; they have gone to Australia, China, Vietnam. They are trying to replicate the success they have in Singapore in markets where public transport still has good long-term potential. In that sense, you will expect ComfortDelgro to have much better earnings growth prospects." The trade-off though, is that expansion brings start-up costs.

So for now, amid high oil prices, and a shrinking taxi market-share, investors will have to be patient when investing in ComfortDelgro. - CNA /ct