• The $900 mln to be spent over 8 years to deal with the ageing rail infrastructure ($112.5 mln pa) will likely unnerve investors first. And merely saying it will be co-funded with LTA does not help either.

• What would be helpful would be for the authorities to clarify that LTA will be responsible for the infrastructure replacements, and SMRT for replacing what needs to be replaced of the operating assets.

• Assuming 50-50 split, which is too simplistic, but which works out to $56 mln a year for SMRT.

• Point is SMRT presently spends about $30 mln a year on repairs and maintenance.

• We have earlier downgraded SMRT to a HOLD.

SMRT to spend S$900 mln to renew, upgrade systems

Public transport operator SMRT Corp said on Tuesday it will spend S$900 million (US$720 million) on renewal and preventive maintenance to address problems that have led to numerous train breakdowns in recent months.

Most of the work will be done over the next four years, SMRT said.

"Some of the measures are already on-going and will be accelerated, while others are new," interim chief executive officer Tan Ek Kia said in a statement.

SMRT said it was discussing cost-sharing arrangements with the Land Transport Authority.

SMRT to spend S$900 mln to renew, upgrade systems

Public transport operator SMRT Corp said on Tuesday it will spend S$900 million (US$720 million) on renewal and preventive maintenance to address problems that have led to numerous train breakdowns in recent months.

Most of the work will be done over the next four years, SMRT said.

"Some of the measures are already on-going and will be accelerated, while others are new," interim chief executive officer Tan Ek Kia said in a statement.

SMRT said it was discussing cost-sharing arrangements with the Land Transport Authority.

• We are less concerned today about the fate of the 6.75 cents per share final dividend for ye Mar ’12.

• While hearings before the Committee of Inquiry will last 6 weeks, yesterday’s opening session (essentially “finger pointing” by LTA, which owns the train infrastructure, and SMRT, the operator) suggests the final outcome may not be as dire for SMRT as feared immediately after the Dec 15/17 incidents.

(Indeed, SMRT’s share price has “rebounded” above the many-times tested $1.73 technical support since the train operator announced on Mar 28th it had completed its internal investigations into the unfortunate incidents.)

• SMRT asserted it has even exceeded the maintenance requirements set not just by LTA but manufacturers of the metal wheels of the trains, and that the ageing infrastructure is to be blamed.

• SMRT has been paying 8.5 cents a share for a few years now, costing $129 mln based on latest issued capital. Profit for 9 months ended Dec ’11 has amounted to $106 mln, and operating cash flow of $200 mln. Besides, SMRT has $182 mln cash after reducing borrowings by $100 mln to $150 mln.

• SMRT will release results for Q4 / Full year ending Mar ’12 on Monday Apr 30th.

• The 4.8% yield justifies at least a HOLD.

MARKET INACTIVITY AHEAD OF FY12 RESULTS

•FY12 results likely to remain weak

•But weakness has already been priced in

•Attractive entry point for dividend play remains

Mass selling did not materialize

Following our last report on SMRT after its 3Q12 results, market activity on the counter has been somewhat muted. Strong selling pressure as anticipated by more than half of the street failed to materialize with the counter trading tightly range-bound for slightly more than two months. During this period, SMRT has also kept to a lower profile with the announcement of work completion from its Internal Investigation Team as the only major development.

Preview of FY12 results

Ahead of the upcoming earnings release at the end of the month, we continue to stress that SMRT is likely to see an upswing in fuel costs following the run-up in prices as well as the additional train runs commissioned in the face of higher ridership and public pressure. Coupled with higher staff costs related to seasonal merit increments and additional headcount to meet service requirements, we are likely to see the weakest quarterly performance for FY12. In terms of fall-out from the Dec 2011 service disruptions, we do not expect any incremental costs at thus juncture as the more important COI inquiry has yet to be completed.

Margin pressures but dividend play remains

While SMRT’s FY12 results are likely to stay uninspiring, the counter’s attractiveness as a dividend play remains its key selling point, which SMRT’s management has maintained and reiterated its commitment to maintain its dividend payout policy. Although its prospects going forward will be challenging – COI findings, no fare increments, SMRT’s “customer “base is still growing. Ridership levels continue to grow especially with support from the current trend in COE prices while rental and advertising yields are naturally competitive given the high foot traffic locations of their stations. With this backdrop and earnings support and stabilization in SMRT’s price, we continue to call for an attractive entry point for SMRT. Maintain BUY at an unchanged fair value estimate of S$2.04.