SMRT Corp - Aligning the interests of all stakeholders


■ Government must be staffed for network issues; MoU to align interests

■ Nothing to firmly suggest nationalisation or asset acquisition as yet

Underperform (4) rating and 12-month TP of SGD1.31 reaffirmed

What's new:
Comments made by Transport Minister Khaw Boon Wan in a Straits Times article (“LTA must be ready to take over MRT operations”, 4 December) appear to have fuelled talk of a potential nationalisation of the Singapore rail network or acquisition of the rail assets in the near term. Our read-through is that rail reliability remains the government’s central focus, and it is keen to reassure the public of the standard of the rail network by ensuring an adequately skilled engineering workforce, as well as by forging an alignment of interests among all stakeholders.

What's the impact:
According to the article, the Transport Minister highlighted the need for “improving integration” in the current rail model between the designer and builder (government) and the operators (SMRT and SBST) by “forging a culture of ‘One Team’”. We take this to mean that the regulator will strengthen its engineering team to ensure that its capabilities are on par with the operators in being equipped to deal with rail-network issues. Further, an MoU has been signed among the various stakeholders (government and operators) to align objectives and interests.

With the Downtown Line (DTL) already operating under a new rail framework, we see nothing to suggest the government could backtrack and completely nationalise the Singapore rail system. Instead, we continue to believe its current strategy of a separation between the government as ‘asset-owners’ and the operators already allows for accountability and a transmission of service requirements through a competitive tendering process (for more, see Initiation: not time to get on board yet, 2 December 2015). Our recent conversations with the operators reaffirm this view.

Technical Analysis
Daily Chart
What we recommend:
We reiterate our Underperform (4) rating and DCFbased 12-month target price of SGD1.31. The biggest upside risk to our thesis remains a potential near-term acquisition of SMRT’s rail assets, as this would likely substantially improve its free cash flow profile. However, we argue that it would be in the best interests of both the government and the Singapore public if SMRT were to fulfil all existing obligations with respect to network efficacy, before addressing any issue of asset acquisition. Further, given that the government already owns rail infrastructure (the assets we expect to be acquired include mainly SMRT’s NSEWL rolling stock), we think a transition to a new rail model is unlikely to materially alter the complexion of SMRT’s rail business positively, from an operational standpoint.

How we differ:
Our FY16-17 EPS forecasts are broadly in line with those of the market. Unlike some observers, we do not believe that an acquisition of SMRT’s North-South East-West Line will happen in the near term. (Read Report)

Source : Daiwa Capital Markets

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