New rail framework falls short of market hopes

SMRT trains travel along Jurong East interchange.
SMRT trains travel along Jurong East interchange.PHOTO: AFP

Analysts have sharply reduced SMRT's target price since the final terms of its asset sale to the Land Transport Authority (LTA) were released last Friday.

Many had perceived that the new rail financing framework would be a positive driver for the stock since talks began in 2011, but the final deal turned out to fall short of market expectations.

CIMB has cut its target price for SMRT shares from $1.40 to $1.17, Credit Suisse reduced its price target from $1.90 to $1.10, while OCBC revised its price from $1.55 to $1.45. Maybank cut its target price from $1.40 to $1.36. Phillip Capital analyst Richard Leow cut his target price from $1.42 to $1.35, citing "little upside for SMRT" under the new deal.

Under the new profit cap and collar structure, the LTA can take up to 95 per cent of SMRT's train profits if it exceeds an Ebit (earnings before interest and taxes) margin of 5 per cent. To be sure, SMRT's rail profits have been in steady decline, with the Ebit margin falling from 23.5 per cent in 2011 to 9.5 per cent last year.

But Mr Leow also noted that "without any operating assets, SMRT loses any bargaining power previously accorded with ownership". Already, the LTA is readying its engineering team to take over the operation and maintenance of the MRT, Transport Minister Khaw Boon Wan said last December.

But CIMB analysts Roy Chen and William Tng also noted that the deal was "fair... given that the transition has relieved SMRT from a $2.8 billion capital expenditure burden (if it were to maintain its rail assets), which would (have sent) SMRT into insolvency under the old framework".

Trading in SMRT shares has been halted since last Friday, when the stock traded at $1.545. Speculation that major shareholder Temasek Holdings may launch a takeover bid for the shares has not been priced in.

A version of this article appeared in the print edition of The Straits Times on July 19, 2016, with the headline 'New rail framework falls short of market hopes'. Print Edition | Subscribe