SMRT Corp - RHB Invest 2015-11-30: Waiting For Rail Reforms To Be Unveiled

SMRT Corp - RHB Invest 2015-11-30: Waiting For Rail Reforms To Be Unveiled SMRT CORPORATION LTD S53.SI 

SMRT Corp (MRT SP) - Waiting For Rail Reforms To Be Unveiled 

  • We think most negatives, ie higher rail maintenance costs and elevated rail infrastructure capex, are already priced in. 
  • Upgrade SMRT to NEUTRAL (from Sell) and raise TP to SGD1.60 (from SGD1.10, 12% upside), aided by lower WACC and cash inflow from a FY17 bus assets sale. 
  • We have not factored in rail reforms (by 2019 possibly). 
  • A back-of-envelope calculation suggests a 37% rise to our current TP if reforms are implemented in FY19. 

 FY17 bus assets sale. 

  • We are now factoring in the sale of non-bus service enhancement programme (BSEP) bus assets to the Land Transport Authority (LTA) at a 10% discount to book value. The sale could generate SGD207m of cash inflow, as the incumbent bus operator transitions into the bus government contract model (GSM) by Sep 2016. 

 Pushing for rail reforms. 

  • SMRT Corp (SMRT) is in discussion with the LTA on the likely transition of its North-South East-West Line (NSEWL) to new a rail financing framework (RFF), under which the authority may have to purchase all related rail assets owned by SMRT. We have stated in our earlier notes that rail reform is inevitable. We have reasons to believe that such reforms could be implemented in 2018 or early 2019, with the LTA providing some clarity on this as early as 2017. 

 What is the upside from rail reforms? 

  • We have not factored in the rail reforms in our estimates. This is due to the lack of clarity on the licence charge that SMRT may have to pay once NSEWL transitions into a new RFF. However, assuming the sale of rail assets at a 10% discount to book value in FY19, this adds SGD0.50 to our current TP, ie 37% higher. 

 Most of the negatives are already priced in. 

  • We do expect a rise in maintenance-related expenses to keep the earnings growth depressed in the near term. However, we believe the negatives relating to the rise in operating costs and a downside risk from the imposition of a financial penalty have already been largely priced-in by the market. 

 Upgrade to NEUTRAL (from Sell). 

  • We increase our DCF-based TP to SGD1.60 (from SGD1.10) and upgrade the stock to NEUTRAL. 
  • We believe SMRT would re-rate once the LTA provides clarity on the transition of its NSEWL to the new RFF.

Shekhar Jaiswal RHB Research | http://www.rhbinvest.com.sg/ 2015-11-30
RHB Research SGX Stock Analyst Report NEUTRAL Upgrade SELL 1.60 Up 1.10