Excerpts from analysts' reports
UOB KH maintains 'hold' rating on SMRT
Analyst: Andrew Chow, CFA (left)
Our take. At this stage, there has been no announcement from SMRT on any potential fundamental change other than the usual reply to SGX that the group is not aware of any possible changes to warrant the rise in share price. We think the market could be speculating on several potential scenarios including:
1) privatisation - which we think is unlikely 2 ) restructuring with comfortdelgro to form an alliance - unlikely in our view as government not likely to favour a monopoly
3) cost plus model (or a new fare review formula for bus) - possible as this is adopted in certain countries and could help stem losses on bus.
4) asset light financing model - possible as we understand the government is considering this option to help operators stem losses from asset ownership and instead, focus on operating and maintaining the assets.
Out of these 4 scenarios, we think the most probable would be (4). The asset light framework proposal (4) is not entirely new as it was initially introduced in 2010 for Comfort's Downtown Line.
According to Straits Times, SMRT submitted a detailed proposal to the government on Wednesday to move its rail business to the new framework. We believe that a potential stumbling block is the valuation of the assets that are to be transferred to the government.
Although the proposed transfer of ownership of rail assets back to the government would save SMRT S$100m-200m in capex and depreciation costs, SMRT will have to pay leasing charges, which could partially mitigate depreciation expenses. In addition, we think the government is likely to impose higher service standards, which could translate to high maintenance and operating costs.
Given these uncertainties, we maintain our forecasts and HOLD rating pending further announcements. We have a DCF-based target price of S$1.10/share. Our latest report on SMRT and the sector, where we highlighted a potential catalyst to be a change in the asset light financing model is attached.
Deutsche Bank has $1.80 target for SMRT
Analyst: Wei-Shi Wu
We fielded numerous investor queries on SMRT over the course of the day. The investors we spoke to were focused on two themes: (1) potential policy announcement; and (2) potential privatization/nationalization of SMRT. Our views are detailed below.
SMRT : On track for a cost-plus model? NextInsight file photo(1) Potential policy announcement
Our thesis that the Singapore land transport sector could be headed for positive reforms remains intact. In our FITT report, “Driving out of the fog” (9 Oct 2013), we argued a move towards a cost-plus operating model would separate the financial performance of public transport operators from the fare affordability discourse – a positive for both operators and the government.
We also highlighted a shift towards cost-plus would immediately reverse losses currently incurred by CD and SMRT on their bus operations, and drive margin stability and earnings visibility going forward. SMRT would be relatively more leveraged to this theme. We note the next Parliament session is scheduled for 16 May.
(2) Potential privatization/nationalization of SMRT
As pointed out in our above-mentioned FITT report, the government has in the recent past dismissed suggestions to nationalize the public transport operators, citing the need for commercially-driven efficiencies to keep running costs low. Furthermore, nationalization of SMRT would raise the potentially complex issue of whether a similar exercise should be undertaken for CD’s domestic public transport assets.
Maintain Buy ratings on SMRT and CD
At current levels, there is still significant upside to our SMRT target price – as such, we reiterate our contrarian Buy call, supported by our sector reform thesis. Similarly, we maintain a constructive view on CD, with out top-of-the-Street target price implying 17% upside from the previous close.
