SMRT Corporation turned in a credible set of 2QFY10 results. Revenue came in at S$229.4m (+1.1% YoY, +6.3% QoQ), in line with our expectations, while net income registered S$52.8m (+24.1% YoY, +9.5% QoQ), slightly ahead of our expectations mainly due to higher other maintenance and related income. For 2HFY10, management expects its profitability to be impacted by higher contracted electricity costs, volatility in diesel prices, and higher operating costs with the ramp-up in Circle Line. However, as we believe higher operating expenses have been adequately accounted for, we keep our FY10F revenue unchanged but raise our profit forecasts by 2.4% to factor in the higher other operating income. As our dividend assumption remains intact, our DDM-based fair value also stays at S$1.92. Maintain BUY on SMRT.

2QFY10 earnings slightly above expectations. SMRT Corporation turned in a credible set of 2QFY10 results. Revenue came in at S$229.4m (+1.1% YoY, +6.3% QoQ), in line with our expectations, while net income registered S$52.8m (+24.1% YoY, +9.5% QoQ), slightly ahead of our expectations due mainly to higher other maintenance and related income. For 1HFY10, revenue was slightly flat (+2.1% HoH) at S$445.3m, forming 49.1% of our FY10 sales forecast, while net income was up 21.9% YoY (+26.5% HoH) at S$101.0m, or 61.0% of our full-year earnings figure. The group ended the period with interim dividend of 1.75 S cents, in line with our projection.

Drivers/drags for 2QFY10 profitability. Main drivers for topline were higher revenue from its Circle Line (CCL) Stage 3 operations, rental revenue and fees from overseas projects. During the half-year period, SMRT also benefitted from higher other operating income, lower energy costs and S$8.9m jobs credit. However, the bottomline was partially dragged down by higher repairs and maintenance costs, and lower interest and investment income.

Challenging outlook for 2HFY10. For 3QFY10, management expects its rental revenue and fees from overseas projects to drive a YoY growth in revenue, though it is expected to be partially offset by lower fare revenue due to the fare reduction package and increased transfer rebates. However, its profitability is likely to be impacted by higher scheduled repair, maintenance and staff costs with the ramp-up in CCL. We also note that SMRT has recently contracted its electricity rates at 11% higher than its previous 6-month contract for a period of 12 months starting 1 October 2009. With higher expected finance costs from the recent issue of S$150m fixed-rate notes and lower jobs credit incentive from January 2010 onwards, we are therefore expecting softer HoH performance for 2HFY10.

Acquisition of Shenzhen Zona. Pursuant to the S&P Agreement for a 49% stake in Shenzhen Zona Transportation, SMRT also announced it has made the first tranche payment of RMB240m (aggregate consideration of RMB320m to be paid in two tranches). As such, this is now an associate company of the group. Profit contribution from the investment is expected to be material within five years of its acquisition.

Reiterate BUY. We keep our FY10F revenue unchanged but raise our profit forecasts by 2.4% in view of higher other operating income (we believe higher operating expenses have been accounted for). As our dividend assumption remains intact, our DDM-based fair value also stays at S$1.92. Maintain BUY on 14.3% potential upside.