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Challenging Outlook Ahead For SMRT
Corporate Digest | 11 February 2011
By: Xavier Lim
Articles (51) Profile

SMRT Corporation Limited (SMRT), the largest MRT operator in Singapore, reported that its 3Q11 net earnings increased 9.6% as compared to 3Q10, due to an absence of $6.6 million impairment of goodwill allocated to the bus operations in 3Q10. Despite revenue for 3Q11 growing 8.5%, SMRT’s earnings before interest and tax (EBIT) declined 6.7% to $52.1 million year-on-year on the back of higher energy, operating expenses and lower other operating income, excluding the goodwill impairment in 3Q10.

Notably, SMRT’s core transportation businesses continue to remain weak; earnings from its train operations fell 21.8% and its taxi operations registered a significant decline of 55.6% in earnings for the 9 months. Both its LRT and bus operations dived into the red in 9M11. Although, rail and bus ridership respectively grew on an average of 12.7% and 7.1% year-on-year (from April to December), which drove SMRT to record an 8.2% jump in its 9M11 revenue, one must be aware that implementation of distance fare scheme was not to help the MRT operator boost its bottomline, but to help commuters save on their transportation fees. This means that SMRT collected lower average fares, which has squeezed its profit margin. In addition, the group’s Circle Line (CCL) is not generating enough average daily ridership to breakeven; current ridership is averaging around 163,000 per day versus expected ridership of 200,000.

However, DMG & Partners believes that once CCL Stage 4-5 is operational by end of 2011, ridership growth is expected to accelerate. The research firm forecasts that the breakeven daily ridership for CCL Stage 1-5 is also expected to increase to more than 450,000 per day. It warned that higher staff cost in 4Q11 due to advance hiring for the CCL Stage 4-5 operations is expected to affect SMRT’s earnings.

Revenue and operating profit from engineering and other services operations inched up 11.5% and 5.3% respectively in 3Q11 thanks to the higher consultancy revenue and fleet maintenance revenue. However, for the 3 quarters, operating profit tumbled significantly amid lower revenue from Palm Jumeirah.

Turning to its advertising operations, revenue increased by 4.9% in 3Q11 and achieved a double-digit percentage growth of 14.4% in 9M11 due to increased advertising on trains, MRT stations and buses. Both operating profit for the quarter and 9 months were up in tandem with the revenue growth.

On the other hand, SMRT’s rental revenue from commercial spaces continues to post robust growth due to increased space following the redevelopment of commercial spaces at various MRT stations. Operating profit rose 8.4% in 3Q11 and 10.6% in 9M11 as compared to the previous corresponding periods. Notably, the Orchard Xchange could potentially add another 1,000 sqm to its lettable space.

Although rental revenue constitutes only 7.5% of SMRT’s total revenue, its operating profit accounts for 27.6% of its total profit from operations. With the progressive opening of new CCL stations, SMRT’s lettable area will further expand down the road. Running MRT operations is no longer an easy business, especially when public transport is politically sensitive and with government plans to introduce more contestability into the system. SMRT should spread its wings and venture overseas in order to stay competitive in the long run. Realising this, the group took its first step and acquired a 49%-stake in Shenzhen Zona Transportation Group Company Ltd to participate in the growth of bus services in China. Perhaps SMRT should focus its efforts on its rental operations and overseas ventures so as to continue giving reasonable returns to shareholders.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

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