Event
The Singapore government’s big policy initiative to convert the public transport operators (PTO) business model to “asset-light” has saved SMRT from the brink, in MER’s view, converting its business model from loss-making to a highly profitable one by FY18.
 
SMRT, given its 100% domestic exposure, is a key beneficiary of the policy changes in the Singapore public transport segment. MER now expects SMRT’s profits to jump by 155% by FY18 from its end-FY14 levels, driven mostly by changes in the “rail” segment in which SMRT has 54% revenue exposure.
 
SMRT is now a key long-term thematic play on the improving policy environment in Singapore and the expansion of public transport. MER upgrades SMRT to Outperform from Underperform with a new target price of S$1.80.
 
Impact
Catalyst 1: Asset purchases in the bus segment: SMRT has ~S$150m book value worth of bus assets on its balance sheet. The government is due to announce policy around these re-purchases soon, which should help SMRT reduce leverage.
 
Catalyst 2: Rail sector policy announcements: This is the major one for SMRT. Rail constitutes 54% of SMRT’s revenues, which is loss-making at the moment. MER expects rail policy announcements to be effective in 2017 and EBIT margins to move toward 10% levels.
 
Catalyst 3: Asset purchase in rail: SMRT has ~S$750m worth of rail assets. Given that MER expects the government to make new rail policy effective by 2017, MER has incorporated the sale of rail assets from 2017, leading to significant de-leveraging of SMRT’s balance sheet (Net debt/equity down to only 25% in 2017 vs 60% now).
 
Catalyst 4: MRT lines tender: Two new MRT lines tender – the Thomson and Eastern lines – are due in end-2014/early-2015. SMRT, with its vast experience in running MRT lines, will be one of the front runners, in MER’s view. MER believes any positive outcome would be a key catalyst.
 
MER’s earnings and target price revision
MER increased its target price to S$1.80 from S$0.81 as it moves to a discounted cash flow (DCF) from a P/E valuation to capture the long-term impact of policy changes in Singapore. For FY15E and FY16E, MER increased forcasted earnings by 11% and 16% respectively. From FY17 onward, MER increased its earnings estimates by 75-100% due to policy change impact being more significant from FY17.
 
MER’s action and recommendation
A thematic play on SG land transport: With many key policy announcements due and further public land transport expansion on the anvil, MER thinks SMRT has become the best way to play the SG land transport sector.

Source: Macquarie Research - 21 Jul 2014