SMRT - DBS Research 2016-07-21: Temasek to privatise SMRT @ S$1.68

SMRT CORPORATION LTD S53.SI

SMRT - Temasek to privatise SMRT @S$1.68

Temasek and SMRT to privatise SMRT through a Scheme of Arrangement.
Offer price is S$1.68; implied PE is 29x/ 36x on FY17F/18F earnings.
Derails our earlier thesis based on fundamentals;
Accept the offer in view of fundamental risks and attractive offer valuation.

Temasek and SMRT announced that SMRT will be taken private through a Scheme of Arrangement. Confirming earlier media reports, Temasek and SMRT announced that it will jointly take SMRT private through a Scheme of Arrangement.

Under the Scheme of Arrangement, we understand that the shares as at book closure will be acquired. This values SMRT at about S$2.565 bn, and upon completion, SMRT will become a wholly-owned subsidiary of Temasek.

It is expected that SMRT will face near term challenges due to rising costs and its ageing network. Even with the announcement and eventual transition to the New Rail Financing Framework (NRFF), it is expected that SMRT’s outlook will still face uncertainties. According to the joint announcement by Temasek and SMRT, the Scheme allows minority shareholders to monetise their holdings and allows the company to remove costs associated with listing requirements.

The offer price is at a 9% premium to SMRT’s last traded price. With the expected transition to the NRFF, we expect SMRT’s earnings to take a knock given its 5% cap on margins for its SMRT Train operations. These include fare and non-fare components, i.e. retail rental and advertising revenue/profits derived from train operations.

In an earlier note on 19 July 2016 (“SMRT: Temasek reportedly mulling buyout of SMRT”), we had indicated that we do not envisage a significant premium to the last traded price but instead expect a slight premium of c.8%. The offer price of S$1.68 equates to 29x/ 36x on FY17F/18F earnings and about 2.7x P/B.

Post the announcement of NRFF, we had revised down our forecasts by 12%/28% on our FY17F/18F net profit given the new terms in a report dated 18 July 2016 (“SMRT: Transit to stable but subdued profits”).
In addition, we had downgraded our recommendation to Fully Valued, from HOLD, with a TP of S$1.28, from S$1.53 (prior to NRFF announcement) expecting a subdued profits going forward. With the Scheme announced, this derails our earlier thesis which was based on fundamental reasons.
Given fundamental earnings risks vis-à-vis offer valuations, we recommend shareholders to accept the offer.

Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-07-21

DBS Vickers SGX Stock Analyst Report ACCEPT OFFER Maintain FULLY VALUED 1.28 Same 1.28