Target price of S$1.60 (3.4x P/B, 23% ROAE) — Over the past year, SMRT's largely domestic earnings and consistent ROE have strongly outperformed Singapore's STI. However, rail (71% of 1HFY09 operating profit) is now showing moderating ridership growth and 2H09 could be impacted by a small bus diesel hedging loss (struck at US$110/bbl, spot US$61/bbl). SMRT looks fairly valued.

December 2008 rail MRT ridership +6.7% yoy — While still on track with our FY09 forecast, MRT December ridership of 1.4m/day has moderated from more than 14% yoy growth in September, in part due to base effects. We also believe SMRT has fully optimized train frequencies for peak hours. Falls in job numbers may temper passenger growth as the economy slows. November 2008 bus ridership was 770k/day, +5.0% yoy.

Retail rental and advertising — While contributing just 9% to group revenues the retail and advertising businesses contribute 28% of operating profit, the result of high margins (retail 75%, advertising 64%). Management are on track for a rental revenue target of S$52m in FY09 (1H: S$28m), having boosted renovated retail stations to 28, with 26,592 sqm of lettable space at 99.3% occupancy. 1HFY09 advertising revenue increased 15% yoy to S$11.6m.

Electricity and diesel — In October 2008 SMRT began a six-month electricity contract at a 30% price increase, in-line with then higher oil prices. Given the sharp fall since, SMRT has renegotiated for lower April-September 2009 pricing (we estimate in the range of 40% lower). For buses, SMRT hedged about half its FY09 diesel needs at US$110/bbl, with spot rate at US$61/bbl, so there may be a small hedging loss in 2HFY09 09 but overall fuel costs should fall.