Core  earnings  were  below  our  expectations.  SMRT's  1QFY13  core  PATMI (this  excludes  S$8m  insurance  compensation  for  a  rail  asset,  S$2m  penalty  by the  LTA  and  COI  related  fees  of  S$1.5m)  came  in  below  our  expectations  and was  down  8%  YoY  to  S$32m  (-11%  QoQ)  while  top-line  rose  9%  YoY  to S$275m (flat QoQ). Including the exceptionals, 1QFY13 PATMI was up 5% YoY to S$36.5m (+162% QoQ). Cost components came in higher than expected and we  therefore  lower  our  FY13  and  FY14  PATMI  by  13%  and  15%  respectively due  to  higher  (1)  staff  and  related  costs,  (2)  depreciation,  and  (3)  repair  and maintenance  costs.  Maintain  NEUTRAL  with  lower  TP  of  S$1.60  (from  S$1.73 previously) based on DCF implying a FY13 P/E of 18x.

Raising our cost estimates. We raise our FY13/14  staff and related costs due to  increase  in  headcount  (mainly  due  to  Train  operations  for  maintenance  and increased  train  runs,  and  service  leaders  for  Bus  operations)  as  well  as  salary increases. Management expects headcount to increase by 10% (from total group headcount of 7,064) in FY13. Our depreciation cost rose due to increases in our capex assumptions which is expected to be S$500m for FY13.

CCL ridership flattish sequentially, Bus ops remains in the red. The average weekday  ridership  for  CCL  was  ~350k  in  1QFY13,  close  to  previous  quarter's average.  Though  this  is  still  below  the  estimated  breakeven  of  ~450k/day  for CCL, management expects ridership for  CCL to continue to grow.  SMRT's  total MRT  ridership  growth  remains  strong,  rising  by  8.6%  YoY  in  1QFY13.  Bus operating losses widened to S$5.2m (+44% YoY, +39% QoQ) due to higher staff costs and depreciation.

Valuations  appear  fair,  await  better  entry  point.  SMRT  does  not  appear cheap  trading  at  18x  FY13  (FYE  Mar)  P/E  versus  ComfortDelGro's  13.6x  FY12 P/E. We think SMRT's share price may see limited upside with  concerns on the cost pressures it faces.

Source: OSK