SMRT Corporation - UOB Kay Hian 2016-07-21: Privatisation By Temasek Via Scheme Of Arrangement

SMRT Corporation - UOB Kay Hian 2016-07-21: Privatisation By Temasek Via Scheme Of Arrangement SMRT CORPORATION LTD S53.SI 

SMRT Corporation (MRT SP) - Privatisation By Temasek Via Scheme Of Arrangement

  • Last evening, Temasek and SMRT jointly announced the privatisation of SMRT by way of a Scheme of Arrangement. Under the scheme, SMRT will be acquired by Belford Investments, a wholly-owned subsidiary of Temasek Holdings, for a cash consideration of S$1.68 per share. 
  • While the offer price of S$1.68 is only at an 8.7% premium to the last closing price of SMRT (S$1.545), we are inclined to accept the offer as it is above the market’s target price range of S$1.10-1.45 (excluding outliers), and looks reasonable in our view. 
  • Accept offer: S$1.68.



WHAT’S NEW


Privatisation via Scheme of Arrangement. 

  • Last evening, Temasek and SMRT Corporation (SMRT) announced the proposed acquisition by Belford Investments (a wholly- owned subsidiary of Temasek Holdings) of all the issued ordinary shares in SMRT. The proposed acquisition will be effected by way of a scheme of arrangement where SMRT will be acquired by Belford for a cash consideration of S$1.68 per share, with a total cash consideration of S$1.18b for about 702m shares not owned by Temasek. Once the acquisition is completed, SMRT will become a wholly-owned subsidiary of Temasek and be delisted from SGX.

Dividend overview. 

  • Shareholders will be entitled to the final (tax-exempt one-tier) dividend of 2.5 S cents per share for FY16. There will be no special dividend arising from asset sale under the New Rail Financing Framework (NRFF).

Shareholder approval threshold

  • Shareholder approval threshold stands at 75% in value of the scheme shares voted at the Scheme Meeting and a majority in number of shareholders present and voting at the Scheme Meeting. Temasek will not be eligible to vote on this occasion.

Other approvals to be sought

  • Other approvals to be sought include that from the High Court of the Republic of Singapore to sanction the Scheme and SGX for the delisting of SMRT.

Expected transaction timeline. 

  • An application will be made to court to convene scheme meeting for shareholders by end-Aug 16. Scheme meetings for shareholders are to be held by Oct 16 and the effective date of the scheme will commence by Nov 16.



STOCK IMPACT


Key rationales of privatisation. 

  • One of the key benefits of privatisation involves SMRT being allowed to focus on its primary role, which is to deliver high quality rail services to Singapore, without the short-term pressures of being a listed company. 
  • As a private company, it will also enable Temasek to provide close support to SMRT as it reinforces its core skill sets in operations, engineering and maintenance. In addition, it removes all costs and distractions associated with listing requirements, including quarterly reporting.

Monetisation opportunity for shareholders. 

  • The take-private by Temasek allows minority shareholders to monetise their holdings through the scheme and avoid the uncertainties from the transition to the NRFF. 
  • If we look at the market’s target price range of S$1.10-S$1.45 (excluding outliers), our view is that an offer price of S$1.68 is at a premium to the market’s target price range, and we see it as a reasonable offer price.

What if the take-over offer is unsuccessful? 

  • The Scheme of Arrangement as discussed herein is subject to compliance with the Singapore Code on Takeovers and Mergers administered by the Securities Industry Council (SIC)
  • Our understanding of Rule 34 of the code indicates that in the event a take-over offer is unsuccessful, except with the consent of SIC, an offeror (and its concert parties) of a failed offer may not within 12 months from the date on which the offer is withdrawn or lapsed, make an offer or acquire any shares of the offeree company.

NRFF caps rail earnings upside. 

  • To recap, under the NRFF, licence charges has been structured under a two-pronged mechanism (revenue shortfall sharing and profit sharing) to allow SMRT to achieve a composite of both fare and non-fare EBIT margin of 5%, with a collar set at 3.5%. While the NRFF is positive for SMRT’s balance sheet given lower capex and higher cash flow, which can be used to retire existing debt, we believe the profit sharing mechanism does not work well in SMRT’s favour, limiting its earnings upside. 
  • As an indication, in the event of SMRT generating an EBIT margin in excess of 5%, LTA will share the upside of up to a maximum of 95% of incremental EBIT margin. We reckon the group may have compromised on its higher margin non-fare revenue stream, which includes both rental as well as advertising. We estimate operating margin for rental and advertising for FY15-16 at circa 60-65% and 55-60% respectively, where a large portion stems from the rail business. Also, it is not a guarantee that SMRT will earn an EBIT margin of 5% given the expected high maintenance and service standard.

Net negative earnings impact under NRFF. 

  • We assume net impact on rail EBIT for both fare and non-fare business going forward will be capped at 5%, down from 14.3% and 9.5% previously recorded by the group in FY15 and FY16 respectively. Henceforth, we have projected FY17-18F net profit under NRFF to decline 19-38% from our original forecast when it was under the current financing framework.



EARNINGS REVISION/RISK

  • No change to earnings forecast.



VALUATION/RECOMMENDATION


Accept Offer. 

  • While the NRFF has a positive impact on the cash flow as well as gearing for SMRT, we believe the terms of the framework capped much of the earnings upside for the incumbent’s rail business. 
  • While the offered scheme price of S$1.68 is only at a 8.7% premium to the last closing price of S$1.545, it is above the market’s target price range of S$1.10-1.45 (excluding outliers), and looks reasonable in our view. 
  • The implied FY17F PE of SMRT at offer price of S$1.68 is 27.5x, and dividend yield is 2.0%, which looks generous, in our view.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-21
UOB Kay Hian SGX Stock Analyst Report ACCEPT OFFER Maintain HOLD 1.40 Same 1.40


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