SMRT Corporation

UOBKayhian on 21 Apr 2015

MRT SP/HOLD/S$1.66/Target: S$1.73

FY15F PE (x): 26.0
FY16F PE (x): 20.1

We analyse the potential impact should SMRT-OMGTEL (OMG) step forward as Singapore’s fourth mobile operator. To re-cap, SMRT and OMG have agreed to work exclusively in a bid for Singapore's fourth wireless telecommunications carrier licence. SMRT carries the option to invest up to S$34.5m via a subscription for shares in OMG. The exercise of the option will be at SMRT's election, and subject to OMG obtaining the telco licence, among others. Not a massive initial capital outlay. At S$34.5m, we think SMRT will likely not be a major shareholder of OMG. SMRT is expected to have at least an equity stake (>20%) for any earnings and equity participation to be meaningful. Should SMRT decide to take on more than 50% ownership (which is unlikely, in our view) or has substantial influence on OMG, the group will have to consolidate any additional debt on its balance sheet, which will further increase its gearing. The group’s net gearing has increased from 60% as at Mar14 to 79% as at Dec14. Maintain HOLD and DCF-based target price of $1.73, implying FY16 dividend yield of 2.7% and PE of 20.1x (WACC: 7.9%, terminal growth: 3.0%). We expect SMRT to rerate should there be any further details offering clarity on the railway restructuring. Entry price is S$1.56. However, we continue to prefer ComfortDelGro for its overseas growth potential, geographical and earnings diversification.