SMRT CORPORATION LTD
S53.SI
SMRT Corporation - UNEXCITING OUTLOOK POST RAIL REFORM
- Selling trains to LTA at S$990m
- Limited upside in margins ahead
- No special dividend from divestment
Transiting to new rail framework from 1 Oct 16
- SMRT Corporation (SMRT) has announced that both SMRT and LTA have finally reached an agreement to transit the North-South and East-West Lines, Circle Line and the Bukit Panjang LRT to the New Rail Financing Framework (NRFF).
- As part of the transition, LTA will buy rail operating assets from SMRT at NBV (estimated at S$990m), comprising assets under work-in-progress (WIP) and assets categorized as Property, Plant and Equipment (PPE).
- Subject to shareholders’ approval at an EGM to be convened, the NRFF will commence on 1 Oct 16, with license period of 15 years with a possible five-year extension.
- NRFF will also transfer all future capex obligations from SMRT to LTA, resulting in improved free cash flow (FCF). In return, SMRT will pay an annual license charge to LTA for the right to operate NSEWL, CCL and BPLRT.
Rail operating margin likely capped at ~5% going forward
- NRFF has always been the key catalyst for SMRT, but looking at the details announced, we think it may not be such a good deal for SMRT as market had earlier expected. First, the NRFF is structured by LTA to allow SMRT to achieve a composite (fare and non-fare) rail EBIT margin of ~5%. For better clarity, note that SMRT’s composite rail
- EBIT margins between FY12 and FY16 ranged from 9.5% to 23.5% under the current rail financing framework (CRFF). Under the NRFF, the annual license charge structure provides a revenue shortfall sharing, and a profit sharing mechanism based on a tiered EBIT cap starting at 5% and EBIT collar at 3.5%. This means any EBIT deviations beyond the cap and collar would be shared with LTA, but LTA’s sharing of downside risks will be limited to the license charge payable by SMRT for the financial year.
Maintain HOLD on lower FV
- With the change to asset-light model and improved FCF outlook, we also change our valuation method from DDM-based to DCF-based (cost of equity: 5.5%, terminal growth: 1.0%) to better reflect SMRT’s value.
- Consequently, on lower earnings forecasts but partially offset by higher FCF ahead, our FV drops from S$1.55 to S$1.45. Maintain HOLD.
Eugene Chua
OCBC Securities
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http://www.ocbcresearch.com/
2016-07-18
OCBC Securities
Analyst Report
1.45
Down
1.55
