SMRT Corp will face lower business risks when the new rail financing framework kicks in next month, but chief executive Desmond Kuek said the rail operator will still face challenges.
"Clearly, it will be a lower risk environment compared with the current arrangement," he said. "There are risk-sharing mechanisms that are not in existence under the current financial framework."
"No business is risk-free," Mr Kuek conceded during an interview with the press yesterday.
Risks, he said, included uncertainty over ridership numbers and fare adjustments.
The Transport Ministry had announced in July that the Land Transport Authority (LTA) will take over all operating assets of the North- South, East-West and Circle lines, as well as the Bukit Panjang LRT Line, from SMRT Trains for $1.06 billion.
In turn, SMRT will run the trains on these lines and retain a share of the earnings. But it will have to pay a licence charge to LTA annually. The fee, which varies according to SMRT's profitability, will go into a sinking fund for asset replacement.
The operator also has to abide by a more stringent maintenance regimen, and higher service standards.
As a result of its asset-light and lower-risk status, SMRT Trains is expected to post an average Ebit (earnings before interest and taxes) margin of 5 per cent over its 15-year contract with LTA - three times less than the average margin it had in the last five years.
The new framework will also have a risk-and-reward sharing formula. If SMRT makes substantially more, the Government can cream off some in the form of a higher licence fee. But if its margin is crimped by new regulations or fare changes, the fee can likewise be reduced.
But because the Government will own all assets in the new financing framework, Mr Kuek said the company will be spared hefty capital expenditures.
SMRT Trains incurred a capital expenditure of $1.2 billion in the last five financial years, and Mr Kuek said it would face a $2.8 billion commitment in the next five years, under the current financial framework.
If the current framework continued, he said, the rail business would be "unsustainable". Its Ebit for FY2016 would plunge from 9.5 per cent to 0.7 per cent.
But under the new rail financing framework, SMRT Trains would have an FY2016 Ebit of 5.3 per cent.
Mr Kuek ruled out the payment of a special dividend to shareholders from the $1.06 billion that LTA will be paying it for its operating assets.
He said this was "part of an understanding with the LTA". Instead, the proceeds will go towards paying $159 million in taxes and retiring $762 million in debts, which will bring its gearing - a percentage of a company's debt over capital - to zero from 67 per cent as at June 30.
On majority shareholder Temasek Holdings' offer to buy over all the shares it does not own, Mr Kuek said he "feels positive" that shareholders will accept it. Temasek owns about 54 per cent of SMRT.
He said: "We understand that there are some who may be sentimental because they had been with us from the time we were listed... I leave it to them to make a decision."
But he added that 10 broker research houses are recommending that shareholders accept the offer, and that an independent financial adviser appointed by SMRT has found Temasek's offer of $1.68 per share to be "fair and reasonable".
The chief executive pointed out that minority shareholders who bought shares at SMRT's initial public offering 16 years ago would have had an 11 per cent annualised return on investment if Temasek's offer was accepted.
Those who bought shares when the stock price was at a peak of $2.34 in 2010 would incur an annualised loss of 1 per cent.