Value Hunting #1: SMRT

1) Introduction

Operates 89.4km of rail line, with 51 stations. Based on its 1Q08 (ended June 08) results:

• 3/4 of profit from MRT.
• 1/4 from building rental at MRT stations.
  
• small losses for bus and taxis operations, which are not counted in the above, and excluded here.

Its contract to operate the EW and NS lines lasts until April 2028. 10+30 years license for the future Circle Line (CCL).

2) Business Model

They own (the right to operate) the rail and trains. After deducting operating costs, the remainder is profit:

• About 40% of their operating costs come from Staff. That the CCL line will be fully automated, so this gives a higher fixed cost while meaning that extra staff do not have to be deployed if train frequency increases.
• 18% for depreciation
• 17% for fuel and electricity
• 8% for repairs and maintainence.

Surprisingly, fuel/energy prices are only a small part of their costs.

3) Future Growth

Soon:

• Circle line. From wikipedia: 33km long, underground, fully automated line. 6 km is scheduled to partially open in mid 2009, and the line is expected to be fully operational in 2011.
• Boon Lay extension: 3.8km extension, 2 new stations beyond Boon Lay. Operational Feb 2009.

So we are looking at a 10% increase in operations (and hopefully revenue and profits) in by end 2009. And an additional 30% increase by 2011 (for the remainder of the CCL).

Far future:

• 14km extension to the Boon Lay extension above, opened by 2015. To bve operated by SMRT.
• Thomson Line, 27km, probably by 2020.
• Downtown line, 40km, probably by 2020.
• LTA has announced that the tenders for operating the Thomson and Downtown lines will be only for 10 years, not the current 10+30 years enjoyed by SMRT.

4) Risks

• terrorist attack
• SARS
• Capex will eventually be required for more trains, if they want to increase frequency of trains during rush hour. Fat chance.
  
• In their 30 year license with LTA, the license fee set at 1% till 2010. After this we do not know what the fees are. I think they are unlikely to raise them when Temasek owns 54% of SMRT.

5) Valuation

• 1.5bn shares outstanding, 1Q08 profit is 2.6c, estimate 10c for whole year.
• 240m dollars cash, BUT 90m spent on acquisition. 1Q08 results says they will spend 91m (6c per share) on FY08 dividends.

I will take into account their projected 40% growth for the next 2 years, giving EPS of 14c. In a bear market, I want a PE of 8.

6) Conclusion
I need to see the share price drop to $1.12 before I am comfortable buying.