We are trimming FY10-11 forecasts by 1-2%. Although we expect fare revenue to be capped by fare cuts, slowing train and bus ridership and lower taxi utilisation, we expect ~5% profit growth to be sustainable as there will be cost benefits from falling energy and labour costs, as well as rising overseas contributions. At the same time, dividend payout is likely intact, which would yield about 5% currently.

Ridership momentum slowed from below 10% (for rail) and below 5% (for bus) in 4Q08, in line with the slowing economy. Nevertheless, we still expect growth in FY10, albeit at low single digit levels (3-4%), as people will still prefer public transport in bad times and Circle Line Stage 3 is set to come onstream from 30 May. However, taxi utilisation should dip further as that is considered a luxury mode of transportation.

SMRT lost $2m in 3Q09 to a forward hedge executed on half of its diesel fuel needs when oil was trading at US$110/barrel, but this contract will expire at the end of Mar 2009 at the same time that electricity prices are expected to fall 25%. Combined, energy accounts for 13-14% of sales. In addition, labour costs (31-32% of sales) will benefit from the recently announced Jobs Credit Scheme.

SMRT recently said it will a $20m pa contract to operate and maintain the Palm Jumeirah monorail in Dubai, which will open in Apr 2009. Bottomline contribution is small (~1%) but it is also looking at M&A in China, Middle-east and Australia. If the recently called-off Shenzhen Zona acquisition is revived (we understand that discussions are still on-going), the earnings impact could be larger.

Present premium valuations are not too exciting although it reflects the defensive nature of SMRT’s business. However, catalysts could arise from overseas acquisitions which could liven up the earnings outlook. We maintain our Hold call on SMRT. For land transport exposure, we prefer ComfortDelgro as there is more potential for earnings upside given its greater sensitivity to oil and more aggressive overseas acquisitions.