SMRT CORPORATION LTD
S53.SI
SMRT Corporation - Recommend Investors To Take The Offer
- Temasek has offered SGD1.68/share (4.5% below our TP) in cash for all shares in SMRT that it does not already own. It plans to privatise the firm with the intention of helping it ride through the medium term uncertainties created by the NRFF implementation.
- We assess that the offer price implies marginally lower EBIT margin for the rail business vs our estimates.
- We recommend investors to accept the offer, as a low EBIT margin scenario remains a possibility.
- Moreover, near-term earnings will remain weak if NRFF is implemented in October.
This is not a general offer.
- Temasek intends to acquire the balance stake in SMRT, take the company private and delist the firm. The nature in which the deal is structured may not allow the former to increase the offer price.
- Temasek is offering SGD1.68/share of cash for all shares it does not own. This offer price does not include the 2.5 cents for the final dividend for FY16.
- If the offer fails, Temasek may not be able to make another offer for the next one year.
NRFF was the trigger point.
- Although Temasek favours the New Rail Financing Framework (NRFF), post its implementation, SMRT is expected to face challenges like costs and uncertainties associated with an ageing rail network. It will also need to deliver greater rail reliability and services under NRFF.
- Temasek believes that SMRT’s privatisation will provide it with the flexibility to focus on its primary role of delivering safe and high quality rail service – without the short term pressures of being a listed company – in the midst of its transition to the new framework.
We suggest investors take the offer.
- Temasek’s offer price of SGD1.68 is only 4.5% below our offer price. We assess that this price implies a long term EBIT margin of 4.5% for SMRT’s rail business vs our base case assumption of 5% EBIT margins. Given near-term cost headwinds and uncertainty on rail fares and ridership, it is likely that SMRT may earn < 5% margins under NRFF.
- We believe the offer fairly compensates shareholders for an expected return that the stock will generate in the next 12 months.
Unhappy investors should make themselves heard.
- Temasek will abstain from voting on the offer.
- In addition to receiving a sanction from the court and an in-principle approval from the SGX, approval of the offer requires > 50% of the shareholders present and voting at the meeting to approve the offer. Those voting in favour of the offer at the meeting must own at least 75% of the shares by value that vote at the meeting.
- As this is not a general offer, investors who abstain from voting will have no say in the final outcome of the voting process.
No impact on the implementation of NRFF.
- SMRT and Temasek view NRFF as a necessary regulatory transition. The offer made by the latter to take the former private does not affect the implementation of the framework.
- SMRT will soon announce the EGM date to seek shareholders’ approval for NRFF implementation.
- Temasek intends to vote in the favour of NRFF at the EGM.
Shekhar Jaiswal
RHB Invest
|
http://www.rhbinvest.com.sg/
2016-07-21
RHB Invest
SGX Stock
Analyst Report
1.76
Same
1.76
