Friday, September 12, 2008

SMRT: Over Priced!

SMRT has gone up roughly 10% for the past month due to the transport fare hike revision. This is exceptional performance considering the STI has retreated about 10% for the same period. If we were in the midst of a bull market, SMRT will likely to rise at least 20%.

However, is SMRT’s share price rise sustainable and justified?

I do not think so. Hence I will be plucking some exaggerated numbers to show that its share price command an unhealthy premium over other stocks.

Today’s papers showed that SMRT and SBS will likely to gain an additional $10.1M in fares from the hike.

How does it affect shareholders and how much net profit will SMRT be able to extract from the increase in fares?

SMRT’s turnover last year was $802M, with a net profit of $150M or a profit margin of 18.9%.

EPS was $0.099 and at Friday’s closing price of $2, PE is at 20.2

If SMRT and SBS were to share the $10.1M on a 70-30 basis (biased towards SMRT), SMRT will be able to gain $7M in fares.

I am assuming that the $7M is additional free money and that SMRT does not need to incur cost to earn it (which is unlikely and exaggerated).

SMRT reported a rise in ridership and retail income. This is likely to translate higher profit levels. I am assuming a (exaggerated) 20% increase in net profit with reference from FY 07.

SMRT net profits for FY 08: $150M+ 20%($150M)+$7M= $187M

The actual amount will be lesser as SMRT has already reported 1 quarter of earnings and the fare revisions will only kick in on 1 Oct.

EPS will be $0.124, PE will be 16 even with the above biased favouring towards SMRT.

Though SMRT is a recession proof business, at current bear market, its forward PE ratio of 16 is far too high and demanding. The paltry dividend yield of 4% does not make this stock attractive in anyone’s portfolio too. This is despite the fact that the dividend payout ratio is 80%.

In actual fact, I think SMRT has a forward PE of at least 18.

I believe the current price of SMRT is too high. I would prefer to invest in SMRT if it falls to $1.40 and below, rising its dividend yield to 6% and above.

It is afterall a good business to own. Your colleagues will be contributing to your semi-annual dividends everyday when they pay to be squeezed like sardines on their way to work daily.


nhyone said...

It's too high to buy, for sure. But how about to sell? Should one sell and buy back later?

Sgbluechip said...

Hi, I would take profits now based on its premium valuation, if I were to hold SMRT stocks.

I suspect it will fall rather heavily on Monday as traders usually sell on news.