OIR BITES: SMRT Corporation Ltd – Root cause of 7 Jul massive breakdown identified‏

Weak electrical resistance tripped power system
After the massive breakdown on 7 Jul 2015, LTA appointed a team of independent consultants to identify root the cause of the breakdown as well as to make appropriate proposal to avoid similar incidents.

Yesterday, LTA and SMRT jointly announced that the root cause was mainly due to the weak electrical resistance of third rail insulator (the third rail serves to supply electrical power to the trains).

The comprehensive system-wide checks across more than 200km of train track and components as well as on all 141 trains led to the finding of water leakage dripping on the third rail insulator between Tanjong Pagar and Raffles Place stations. The water contained mineral that significantly reduced the effectiveness of the insulator.

The weak resistance of the insulator allowed electricity from the electrified third rail to flow through to the ground, which under proper functioning system, will not happen. This resulted in the activation of safety mechanism that tripped the power system and led to the network wide disruption on 7 Jul.

Addressing the root cause
SMRT has combed through the North-South and East-West Lines (NSEWL) tunnels to ensure no other leaks dripping on to trackside installation.

Immediate correction actions include replacing all the third rail insulators, and work has already started with insulators that show signs of electrical resistance weakness, while the remaining will be changed as part of the ongoing planned renewal of the third rail system, to be completed by 1QCY17.

SMRT will also be installing data loggers at all 47 traction power substations on the NSEWL within the next two months to better monitor the condition of the insulators.

A joint LTA-SMRT team will monitor the progress of these changes.

Impact on SMRT
Since our last report on SMRT on 15 Jul, nothing has changed fundamentally for SMRT. The renewal of the third rail system is a planned repair & maintenance (R&M) activity, and we believe the material increases in our R&M expenses assumptions since Mar 15 provide more than enough buffer with this set of correction actions announced.

The amount SMRT will be fined by LTA for this disruption is still uncertain but we had earlier estimated an amount slightly more than S$10m. Given the uncertain nature of this potential fine, we opt to keep our assumption unchanged.

On its outlook, we remain positive given the impending regulatory changes in bus and rail operating model. In our view, the key longer-term catalyst for SMRT is still the regulatory change towards the new rail financing framework.


Technical Analysis
Daily Chart
Hence, we reiterate our BUY rating on SMRT, with the same FV of S$1.75. Note that SMRT will be announcing its 1QFY16 results in the evening, after market close.

Source : OCBC Investment Research

Labels: ,