• Fare business in the red
• Awaiting rail financing framework updates
• Bump up FV but maintain HOLD

More positive outlook following policy change

Operating profits for SMRT’s fare business (Bus, LRT and MRT) has been on the downtrend since FY09. This even slipped into the red in FY14, with an operating loss of S$25.0m registered, versus an operating profit of S$32.3m in FY13. The main drag came from its Bus operations, which recorded an operating loss of S$28.4m, while its Train business also experienced a 91.6% plunge in operating profit to just S$5.5m in FY14. We believe the transition of the public bus industry towards a “Government contracting model” will help to alleviate the pressures for the operators such as SMRT, as the revenue risk will now fall under the Government. This new model will allow SMRT to return to profitability for its bus operations in FY17, based on our estimates.

Rail financing framework could be implemented next

Following the implementation of the “Government contracting model” for buses, we believe there are now stronger expectations for updates from the Government on the rail financing framework. Assuming LTA does intend to own the rail infrastructure and operating assets (as was the case for Downtown Line), SMRT would stand to benefit more than ComfortDelGro as the latter does not carry any rail assets on its balance sheet. Based on our estimates, the net book value of SMRT’s rail assets is worth ~S$1b. If the sale of these assets back to the Government does eventually materialise, it would strongly bolster SMRT’s balance sheet. We have not factored in this scenario in our model.

Maintain HOLD

Switching our focus back to the new bus contracting model, we retain our FY15-16 forecasts but raise our FY17, FY18 and FY19 PATMI projections by 7.9%, 13.4% and 12.3%, respectively. This bumps up our fair value estimate from S$1.25 to S$1.40. Given SMRT’s robust share price run-up in recent weeks, we believe these positives have been priced in. Hence, we maintain HOLD on SMRT.

Source: OCBC Research - 23 May 2014