SMRT Corporation - CIMB Research 2016-08-08: Minority shareholders should accept the offer

SMRT CORPORATION LTD S53.SI

SMRT Corporation - Minority shareholders should accept the offer

1QFY17 core net profit was below expectations, at 20% of our FY3/17 forecast.
However, we view 1QFY17 results as irrelevant, given the privatisation offer by major shareholder Temasek, via a scheme of arrangement.
We believe the offer price of S$1.68 is in favour of minority shareholders. Hence, we recommend that minority shareholders accept the offer.

1QFY17 net profit fell 23% yoy from S$20.1m in 1Q16 to S$15.5m (US$11.4m) due to the 2% yoy decline in revenue from S$320m in 1QFY16 to S$314m (US$231m) in 1QFY17.
1QFY17 EBIT weakness was broad-based across major operating segments: bus (fare) EBIT fell S$1.3m yoy to S$0.2m (1Q16: S$1.5m); taxi EBIT fell S$1m to S$4.5m (1Q16: S$5.5m); rental EBIT fell S$0.5m to S$20.6m (1Q16: S$21.1m).
The rail (fare) business was of our particular interest; its operating loss widened from S$5.3m in 1QFY16 to S$9.4m in 1QFY17 due to higher operating expenses and the cannibalisation effects of Downtown line operations.

We think SMRT’s poor 1QFY17 results will not bother investors, given privatisation bid by 54% controlling shareholder Temasek. On 20 Jul, Temasek announced the proposed acquisition of the remaining 46% stake via a scheme of arrangement.
The scheme price of S$1.68 represents 11%/9%/16% premium over SMRT’s 3-/6- /12-month volume weighted average price on the announcement date and a 32% premium over our previous target price of S$1.17 (based on FY17 DCF).
For the scheme to be effective, it must obtain the approval by a majority in number of scheme shareholders (excluding Temasek) present and voting, either in person or by proxy, at the scheme meeting, such majority holding not less than 75% in value of the scheme shares voted at the scheme meeting.

The privatisation should give SMRT more flexibility to focus on its primary role as a transport service provider, without the pressures of a listed company, during its transition to the New Rail Finance Framework (NRFF). It also enables Temasek to closely support SMRT as it reinforces SMRT’s operations and maintenance.
For minority shareholders, it offers a good opportunity to monetise their holdings and steer away from the uncertainties related to the transition to the NRFF.

The above reasons make sense to us. We view the privatisation offer as a big favour extended by Temasek to SMRT’s minority shareholders, as we believe that the offer price of S$1.68 is significantly higher than the valuation that SMRT deserves in an arm’s length transaction. The offer price translates into FY17-19F P/E of 33-35x (FYE: Mar), representing 78-97% premium over its key competitor ComfortDelGro’s FY16-18F P/E of 18-19x (FYE: Dec).
According to Temasek, the offer price of S$1.68 is final. We recommend that minority shareholders vote in favour of the scheme at the upcoming scheme meeting (in Sep/Oct-16). Should the scheme fail to go through, we expect SMRT’s share price to fall below our previous target price of S$1.17 (based on FY17 DCF, WACC: 6.5%).

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-08-08

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