SMRT – Maybank Kim Eng

Share price surged… avoid the hype

  • Share price surged 18.5% to its highest since 10 Dec.
  • While a favourable transition of its business model is likely, this surge is speculative in the absence of announcements by the regulators or operators.
  • Maintain Sell with TP of SGD0.60, based on 14x average EPS for FY3/14-16.


SMRT’s share price surged…

SMRT’s share price surged by 18.5% to close at its highest in almost five months, stoking speculations of impending corporate developments. In response to this, the stock exchange’s surveillance department has issued a query to which SMRT has replied that they are not aware of any news that has caused the price surge.

… Avoid the hype; maintain SELL

In our view, there are two possible corporate developments:

1) Nationalisation of SMRT via a general offer. This allows SMRT to run as a non-profit organisation. However, we think this is unlikely as Singapore’s Transport Minister had previously argued against nationalisation on ground that nationalisation may lead to higher fares and become a burden on taxpayers.

2) Favourable transition to new business model for fare-based business. This is a more likely scenario. SMRT’s core fare-based business suffered an operating loss of SGD32m in 2013 and is expected to remain a key drag to profitability in the future. While a change is imminent, it is highly speculative to conclude that the terms will be favourable to shareholders. In particular, we are concerned over the treatment of the asset purchase obligations under the old rail financing regime (note). In the absence of material announcements, we advise investors to stay cautious. SMRT trades at a rich valuation of 30x FY3/15E P/E. Maintain SELL with TP of SGD0.60.

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