Bumpy ride ahead for SMRT

Falling net profits, persistent cost pressure and declining weekly ridership for CCL – what else to expect?

SMRT’s net profit fell by almost 14% YoY to $37.0m in 3Q, weighed down by higher energy and other operating expenses. Looking ahead, management expects the profitability of its train operations to be impacted by the increased costs arising from the recent MRT service disruptions.

According to brokerage firm KimEng, persistent cost pressure remains its biggest concern as SMRT’s EBIT margin narrowed by 4.6ppt to 16.7% in 9MFY Mar12 compared to 21.3% a year ago. “The permanent spike in repair and maintenance expenses in subsequent quarters will put another dampener on its bottomline,” says KimEng analyst Eric Ong adding that the firm’s management also cautioned that its bus business could be further impaired if diesel prices were to stay at their current high levels.

Another cause of concern according to Mr. Ong is the possibility that Circle Line (CCL) may face plateaued ridership. “Particularly disappointing was the fact that average weekday ridership for the Circle Line (CCL) stayed stagnant QoQ at around 300,000. While management is still guiding for a breakeven daily ridership of 400,000 to be achieved within 6-9 months from the opening of the final 12 stations of CCL last October, we think that this projection now seems overly optimistic as the gestation period could be much longer than expected,” he said.

KimEng trimmed its FY Mar12F-14F forecasts for SMRT by 3-4% to take into account a lower ridership growth assumption.

On the bright side, SMRT’s taxi segment performed better than expected, with revenue jumping by 28.4% YoY to $29.6m due mainly to higher fees from a larger average hired out fleet. Rental income from commercial spaces rose by 11% YoY to $20.7m as a result of the increase in leasable area following redevelopments at several MRT stations. Average occupancy rate has also improved to 98.2% from 96.4% in the last quarter.