SMRT Corporation (SMRT), the second largest public transport operator after ComfortDelGro, was listed on Mainboard in July 2000. It constitutes one of the 30 components of the Straits Times Index (STI).

For the year 2009, its share price underperformed the STI, which rose by 13.7% while the former soared by approximately 58%. Its business segments consist of bus, rail, taxi, rental and advertising operations.

3Q10 Hit By Goodwill Impairment

Over the past few years, SMRT’s financial performance has been relatively stable, and for 9M10, revenue rose marginally by 1.2% and the 13% rise in earnings could have been higher if not for the lackluster performance in 3Q10.

3Q10 revenue rose by 2.6%, attributable to higher MRT ridership, contribution from Circle Line (CCL) stage 3 and higher rental and advertising fees, partially offset by lower average MRT fares. Earnings fell by 4.8% and were mostly impacted by the impairment of goodwill of $6.6m, higher staff costs and repair and maintenance costs, mitigated by higher other operating income. Excluding the goodwill impairment, 3Q10 earnings would have grown y-o-y.

The impairment of goodwill arose from the bus operations as SMRT believes the long-term bus ridership growth trend will decline. With increased transfer rebates, SMRT expects the travel pattern of commuters to shift towards train journeys and shorter bus trips.

The near term outlook for rail ridership is enhanced with the impending opening of CCL stage 1 and 2, starting from Tai Seng to Dhoby Ghaut (11 stations) on 17 April 2010. The CCL network is not expected to breakeven until it becomes fully operational in 2011. Currently, only 5 out of the 16 stations of the CCL network are operational. The government expects the daily number of commuters to go up to 200k from the 30k for the first 5 stops.

Given the slew of government initiatives to increase usage of public transport and plans to double the rail network by 2020 with enhanced connectivity of the train network, the shorter traveling time will encourage commuters to take the train, hence long-term prospect of rail ridership remains positive.

Uncertainties Ahead

Citigroup issued a ‘Sell’ call on SMRT with a target price of $1.60 and noted that the following factors pose some upside/downside risks to its target price, namely a) rail and bus ridership; b) fare revisions in June; c) success of CCL in 2010; d) sharp rise/decline in electricity and diesel prices; e) ability to improve profitability of taxi, bus and LRT operations; and f) long-term government plans in the land transport review.

Another major development in the rail industry is the Downtown Line (DTL) which will link the northwestern and eastern parts to the central business district and Marina Bay upon completion. Market watchers expect LTA to call for the tender of the DTL soon and SMRT stands a good chance of winning given its proven track record and ability to employ economies of scale with the integration of the DTL line with its current operations. However, uncertainties remain as the government has mentioned in the public transport road map that they prefer more competition in the public transport sector.