Analyst: Andrew Chow, CFA (left)
Our take. At this stage, there has been no announcement from SMRT on any potential fundamental change other than the usual reply to SGX that the group is not aware of any possible changes to warrant the rise in share price. We think the market could be speculating on several potential scenarios including:
1) privatisation - which we think is unlikely 2 ) restructuring with comfortdelgro to form an alliance - unlikely in our view as government not likely to favour a monopoly
Our take. At this stage, there has been no announcement from SMRT on any potential fundamental change other than the usual reply to SGX that the group is not aware of any possible changes to warrant the rise in share price. We think the market could be speculating on several potential scenarios including:
1) privatisation - which we think is unlikely 2 ) restructuring with comfortdelgro to form an alliance - unlikely in our view as government not likely to favour a monopoly
3) cost plus model (or a new fare review formula for bus) - possible as this is adopted in certain countries and could help stem losses on bus.
4) asset light financing model - possible as we understand the government is considering this option to help operators stem losses from asset ownership and instead, focus on operating and maintaining the assets.
Out of these 4 scenarios, we think the most probable would be (4). The asset light framework proposal (4) is not entirely new as it was initially introduced in 2010 for Comfort's Downtown Line.
According to Straits Times, SMRT submitted a detailed proposal to the government on Wednesday to move its rail business to the new framework. We believe that a potential stumbling block is the valuation of the assets that are to be transferred to the government.
Although the proposed transfer of ownership of rail assets back to the government would save SMRT S$100m-200m in capex and depreciation costs, SMRT will have to pay leasing charges, which could partially mitigate depreciation expenses. In addition, we think the government is likely to impose higher service standards, which could translate to high maintenance and operating costs.
According to Straits Times, SMRT submitted a detailed proposal to the government on Wednesday to move its rail business to the new framework. We believe that a potential stumbling block is the valuation of the assets that are to be transferred to the government.
Although the proposed transfer of ownership of rail assets back to the government would save SMRT S$100m-200m in capex and depreciation costs, SMRT will have to pay leasing charges, which could partially mitigate depreciation expenses. In addition, we think the government is likely to impose higher service standards, which could translate to high maintenance and operating costs.
Given these uncertainties, we maintain our forecasts and HOLD rating pending further announcements. We have a DCF-based target price of S$1.10/share. Our latest report on SMRT and the sector, where we highlighted a potential catalyst to be a change in the asset light financing model is attached.
No comments:
Post a Comment