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SMRT - Price surged today with heavy volume; queried by SGX

Shared By StockFanatic on Thursday, April 24, 2014 | 24.4.14

Daily Chart
Share price of SMRT surged more than 20% today, hitting as high as S$1.24. The stock was heavily traded and eventually closed at $1.215 (up 18.5%).

What we think:
Two possible reasons.

Scenario 1: Railway Financing Framework in place - Highly possible - 
We believe that SMRT is making inroads with regulators regarding the accounting of asset transfers under the new rail-financing framework. This is assume to be very close to a conclusion. In short, the end result will be a predictable cash flows and a more sustainable financing model, which will alter the fate of the company.

Think of this as a “cost-plus” model on a Public-Private-participation scheme. Under the new rail financing framework, LTA will collect a licence charge that the operator will pay for the right to run and generate returns from the revenue service. The monies received will be pooled together to replace and enhance operating equipment such as trains, signaling systems and other operating assets for operating the Railway Transport System (RTS).

The licence charge comprises fixed and variable components. The fixed component is calibrated to take into account factors such as the viability of the line, its long-term operational and maintenance needs, and the benefits and costs that the line is likely to bring to/impose on the rest of the railway network. The variable component ensures the appropriate level of risk-sharing between government and the operator.

What this means in our numbers?
We modeled in significant amount of service enhancement works that would be completed within the next 24 months, related costs would taper, leading to margin recovery in FY2015F. As such, we should see a 36% yoy improvement on core net profit (FY15 net profit S$84m).

The shift/change in business model (to cost-plus model, if indeed this happen) will would also go a long way into reversing SMRT’s bus losses 12-18 months from now and significantly improve margins, earnings and cash flows. This should help mitigate the incremental costs required to improve the other related opex (e.g. staff costs, repairs and maintenance costs, etc.), which are currently causing severe the cost-revenue misalignment.

Technical Analysis
Daily Chart
Scenario 2: Nationalization of SMRT? - Lower possibility – 
Though not ruled out entirely, is the possibility of nationalizing the company. Hard to imagine why that should be the case. We do not think it is in the interest of the government to “own” back the company, and subject itself to further abuse from disgruntled commenters whenever trains breakdown, or fare increase is necessitated. Yes, granted that Temasek owns 55% of the company, but this is not so Olam-like. Of course, many of us are left scratching our heads on that transaction.

What you should do:
Fare adjustment remains a problem and revenue growth will still lag behind cost inflation. Once the new railway financing framework come into play, and predictable cash flows and a more sustainable financing model are ensured, fate of the company remains bleak. Until then, the stock may continue to struggle.

Source : CIMB Research

Posted on Thursday, April 24, 2014 | 24.4.14
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