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SMRT: Towards An Asset-light Frontier
Corporate Digest, Featured | 08 May 2014
By: Peter Ng
Articles (81) Profile

SMRT Corporation has recently announced its full year results for FY14, and came without doubts, the company’s operating performance remained largely weighed down by not only its rail business, but its entire fare segment. Its fare segment includes train, LRT and bus operations.

On the contrary, despite its weak performance, the company’s share price has pranced up a good 23.5 percent to close at $1.26 on 5 May 2014, which leaves one wondering how a reaction like this could even be possible.

It does not take much to figure out that something else needs to be broiling, significantly, in order to cause such a phenomenal move in the company’s share price.

Indeed, at the company’s 4Q14 results briefing, Chief Executive Officer of SMRT, Desmond Kuek, has announced that a proposal which highlighted the possible adoption of a rail financing model which has already been submitted to the Singapore government.

In short, this framework will overhaul SMRT’s balance sheet into one which is asset-light via a proposed disposal of the company’s train assets to the Government.

Nope, SMRT is not exiting its train business.

The move would transfer these train assets onto the Government’s balance sheet and purview. In turn, SMRT would lease these assets and operate them the same way in which Redhill station has been on the green line.

From an investor’s perspective, this move if completed will be a potential catalyst for SMRT’s future operating performance, and needless to say, its share price.

Bolstered by a consistent growth in passenger ridership, between 2005 and 2014, SMRT’s revenue has registered a 10-year compound annual growth rate of 5.6 percent.

Its stellar performance is of no surprise, considering the resilience and monopolistic nature of the public transport business in Singapore, where the company possesses a 78 percent market share for its four lines of MRT along with a daily ridership of 1.9 million.

The indentation lies in the company’s sizeable amount of operating expenses, compressing its operating profit margins, where a hefty amount of surplus have already been sieved out before they can reach the bottomline.

For FY14, operating expenses incurred from its rail business alone was $526.4 million, which accounted for as much as half of SMRT’s total expenses.

Under the proposed framework, SMRT could be expecting at least a 10 percent reduction in its train operating expenses, assuming the Government was to rent the train assets to the company at a slight premium above depreciation while still accounting for inflation.

Should this materialise in 2016, shareholders of SMRT have much to cheer for.

Investment Merits

  • Monopolistic business which occupies a 78 percent market share in its train business
  • Business model in public transport is generally a necessity for everyone
  • Visible and consistent revenue stream that can be observed through its ridership

Investment Risks

  • Operating margins remained hampered until a better financing framework  is adopted
  • Future development to disperse population concentration might cause a fall in market share
  • Performance of bus and taxi operations still remain in a lacklustre position with no potential catalysts

SI Research Takeaway
In spite of the long and taxing process involved to turn SMRT into a “Rail Estate Investment Trust” for the Government, expected to be completed in 2016, SMRT would be the beneficial of tamed operating expenses from its train operation.

However, an investor should also note that before the rail financing framework materialises, investments at this juncture are nothing short of speculation.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

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