News analysis

Temasek's SMRT buyout a maybe-win case for investors

Shareholders should not expect fund to cover their risks even as firm, riders benefit

In 2001, a year after it was listed, SMRT Corp paid main shareholder Temasek Holdings a special dividend of $540 million.

The transport operator has since paid out a further $1.2 billion or so in dividends to shareholders.

Temasek, which owns 54 per cent of SMRT, would have collected another $630 million or so, meaning the state investor has collected close to $1.18 billion in dividends from SMRT.

Temasek's offer to take SMRT private - made through a scheme of arrangement last month - is also $1.18 billion.

As such, the majority shareholder is merely distributing its share of dividends to every other shareholder. In a strange way, it may also be viewed that SMRT - or more rightly, its commuters - is financing this buyout.

If so, it would be poetic justice, since critics have long accused SMRT of rewarding shareholders at the expense of commuters. Given the frequency of rail breakdowns in recent years, the accusation is not completely groundless.

If Temasek's offer is accepted, the transport operator will once again belong solely to the state - which was the case before it was floated in 2000. And since the people make up the state, SMRT will once again belong to the people of Singapore, most of whom take public transport.

If Temasek's offer is accepted, SMRT will once again belong to the people of Singapore. Shareholders who bought stakes from the start have enjoyed decent returns. Those who bought in 2010 may not be pleased with the offer.
If Temasek's offer is accepted, SMRT will once again belong to the people of Singapore. Shareholders who bought stakes from the start have enjoyed decent returns. Those who bought in 2010 may not be pleased with the offer. ST PHOTO: KUA CHEE SIONG

Indeed, this monumental change should benefit the commuter.

Freed from the pressure of matching the dividend payouts of other listed companies, SMRT will have more resources to keep its operating assets ship-shape. In turn, that will help it meet higher service standard.

Separately, a shift to the new rail financing framework - also announced last month - will be a further boon to the operator.

In this framework, the Land Transport Authority assumes ownership of all operating and fixed assets. It will pay for replacement assets too. This removes hefty and lumpy capital expenditures from SMRT, and again helps it to better focus on service standards.

So Temasek's move is good for the operator and good for commuters. But where does it leave minority shareholders?

Well, if such shareholders had been holding SMRT shares from Day One, they would have enjoyed more-than-decent returns.

SMRT has been declaring more than half its profits as dividends (excluding the extraordinary maiden payout to Temasek in 2001).

Since its float, the dividend yield on this stock has ranged from 0.91 per cent to 5.17 per cent, averaging 3.14 per cent.

Of course, the yield depends on what price an investor bought the stock at. How attractive Temasek's offer of $1.68 per share also depends on this.

But it would appear that anyone who bought the stock before 2007 would find the offer reasonable. Thereafter, the stock price has been on a roller coaster and those who bought in 2010, when it breached $2, would not be pleased.

That is the nature of the market, though. And to expect Temasek to compensate all of SMRT's 49,562 shareholders for the individual risks they took willingly would not be fair to the general public.

It would not be unfair, however, for shareholders to demand a special dividend from the $1 billion SMRT is receiving from the LTA for its rail assets.

A version of this article appeared in the print edition of The Straits Times on September 01, 2016, with the headline 'Temasek's SMRT buyout a maybe-win case for investors'. Print Edition | Subscribe