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SMRT: For Better Or Worse?
Tradeable, Tradeable Ideas | 29 May 2014
By: Raymond Leung
Articles (142) Profile
  1. The new bus system implemented by LTA will see companies receiving a fixed amount for services while the government retains fare revenue.
  2. SMRT likely to have an increase in cash on hand and face lesser revenue risk.
  3. In the event where LTA replicates the system to public trains and LRT, it will be beneficial to SMRT.

 

The Land Transport Authority (LTA) has recently announced its plan to restructure the public bus industry. Under the new operation model, all bus operators will now bid for the rights to operate services based on routes. In turn, LTA will pay the operators a fixed amount for the services while the government retains the fare revenue.

The new system will phase in beginning of 2H14 with full implementation taking place in 2H16. All bus infrastructures including bus depots, buses and fleet management system will be sold to and operated by the government.

In contrast to SMRT’s bus sector which seems to be driving the group downhill, they are expected to benefit from the new system. Receiving a fixed amount based on successful bids of services, SMRT will face lesser revenue risk from operations.

For FY14, the bus division of SMRT recorded an EBIT (Earnings Before Income Tax) of negative $28.4 million.

With sale from their operating assets, SMRT will benefit from the likely increase in cash on hand and lesser financial cost incurred. As such, operating margin for the bus division should improve significantly.

Under the new system, entry barriers for new bus operators will be lower as key infrastructures such as bus depots and buses will now be owned by the government.This will ensure a smooth transition from the incumbent to any new operators.

However, this will bring about a higher number of competitors as new local and foreign operators enter the market. Even so, SMRT is poised to fend off its competition considering its broad experience in the sector.

Market watchers are speculating a testing ground from the upcoming bus system for a whole new public transport structure. LTA is currently in discussion for a possible replication to the train system. If the new business model is replicated to the public train and LRT system, SMRT will see enhanced profits.

In view of changes and discussions to the new public transport structure, analysts from CIMB Research believe it will add value to SMRT in the long run. They gave the group a “Buy” call with a target price of $1.67.

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Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.


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