SMRT CORPORATION LTD
S53.SI SMRT Corporation - Rail Reforms May Be Coming Soon
- We maintain BUY on SMRT Corp (SMRT), but raise our DCF-derived TP to SGD2.25 (vs SGD1.61, 45% upside) as we believe its train business’ transition to the NRFF seems more likely.
- While the train network’s deteriorating operating condition – despite ongoing efforts to renew the infrastructure – may lead to earlier implementation of rail reforms, we estimate them to be implemented in 2019.
- Near-term earnings may stay pressured by the train wing’s continuing losses, and the likely imposition of a financial penalty for a recent breakdown and fatal accident.
We expect operating losses for SMRT’s train business till FY18, amidst:
- Elevated maintenance-related costs;
- Train revenue cannibalisation from the start of operations at Downtown Line 2;and
- Lower average fare due to the 1.9% fare reduction announced Dec 2015.
- We expect the business segment to report an operating loss margin of 1% each for FY17 and FY18.
Potential for additional rail capex to create financial stress.
- The train breakdown in April was caused by a power system failure. Following the incident, Transport Minister Mr Khaw Boon Wan said that in order to cope with additional trains and increased frequency, the train power systems may have to be upgraded.
- While the cost or timeline for of a full replacement of the existing systems are unavailable, we estimate an overhaul to cost SGD100m -150m. If implemented, it would create additional financial stress on SMRT’s already leveraged balance sheet.
Rail reforms may come earlier.
- Given the deteriorating operating conditions of the train network, the transition of SMRT’s rail business to the New Rail Financing Framework (NRFF) may occur anytime between the commencement of the Government Contracting Model (GCM) for its bus division and 2019.
- We conservatively estimate the rail reforms to be implemented in early FY20.
Near-term downside risks persist.
- While we have not factored in any financial penalties, we believe near-term losses for SMRT’s train business could increase – due to potential Government-imposed financial penalties for the unfortunate fatal incident in March and the April train disruption.
Long-term outlook seems more positive.
- While near-term earnings may remain subdued, we believe the implementation of rail reforms is becoming more of an eventuality. This would be positive for SMRT, as it not only converts its rail business into an asset-light model, but also enables the division to earn a conservative 5% operating margin.
- We estimate the sale of train rolling stock to the Government at a 10% discount to book value to translate into SGD590m worth of cash receipts in 2019. This would help SMRT to reduce its debt burden.
- We expect the company to become net cash by 2020.
Shekhar Jaiswal
RHB Invest
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http://www.rhbinvest.com.sg/
2016-05-04
RHB Invest
SGX Stock
Analyst Report
2.25
Up
1.61
