■ Market has reacted positively to a speech made by the Transport Minister.
■ Run up in share price for SBST and SMRT has been unwarranted, in our view.
■ We are negative on the Land Transport sector.
What is the news?
Transport Minister made a speech last Friday at a Joint Forum on Infrastructure Maintenance. He outlined the collaboration and Memorandum of Understanding (MoU) on infrastructure maintenance between LTA, PUB, SBST and SMRT during his speech. Of particular interest was the push for an integrated approach in Rail between LTA, SBST and SMRT. He also voiced his desire for LTA to establish an engineering team capable of taking on the operations and maintenance of the Rail systems, should that become necessary.
How do we view this?
Transport Minister's comments on Rail restructuring focuses on reliability through collaboration, which is vastly different from what the RFF is expected to achieve.
We view the Minister's comments positively for Rail reliability through collaboration between LTA, SBST and SMRT. We believe that the intent of the collaboration is for the three parties to work together at the upstream stages of the Rail life-cycle, to address issues as early as at the procurement and design stages. The Regulator has traditionally taken on the role of designer and builder, but had failed to take into consideration downstream issues which SBST and SMRT, as maintainer and operator have a better grasp of. We believe that the Transport Minister is firmly committed to improving the Rail reliability through identifying problems early before they subsequently cascade into bigger problems. Possible impact would be lower expenses for Repair & Maintenance in the future.
In contrast, the transition to RFF, which was first publicised by SMRT (and not LTA) during its full year FY3/14 results in April 2014, has the sustainability of the Rail fare business in mind, which is a profit-oriented motive.
Will transitioning to the RFF improve rail reliability? Not necessarily so.
The asset-model component of the RFF involves the LTA being responsible for ownership and renewal of operating assets and rolling stock. This would almost certainly improve free cash flow for the two incumbent PTOs as it would relieve them from hefty capital expenditures.
The revenue-model component of the RFF which the DTL is already operating on, consists of a Fixed Charge (fixed component) and a Revenue Share Charge (variable component). Transition to the RFF is widely expected to be beneficial for the PTOs, especially SMRT, turning its Rail business profitable. (SMRT 1H FY3/16 Rail business suffered an operating loss of S$9.3 mn.)
The presumption is that in lieu of spending cash on renewing operating assets, the incumbent PTOs would have more resources to channel to maintenance. This is debatable and it remains to be seen whether that will really happen. (Read Report)
Source : Phillip Securities Research