SMRT

Kim Eng on 9 Jan 2012

Calling it quits. SMRT president and chief executive officer Saw Phaik Hwa has stepped down with effect from last Friday, following a recent spate of train breakdowns. Ms Saw, appointed in December 2002, has been the key driving force behind SMRT over the past nine years. We were slightly surprised by the timing of her resignation, just weeks after she said that she wanted to “stay put to make everything right”.

Search for successor. Mr Tan Ek Kia, a board member and former managing director of Shell, will act as interim CEO while the search for a successor begins. According to SMRT, Ms Saw will remain with the group to assist the relevant investigation teams and the Committee of Inquiry reviewing the underlying causes of the train disruptions last month, as well as help with the transition to new executive leadership.

Increased focus on rail operations. Ms Saw was largely credited for transforming SMRT into a multi-modal transport company by capitalising on opportunities in retail and advertising to diversify its income base. The group’s net earnings grew almost three-fold from $56.8m in 2002 to $161.1m in 2011 during her tenure. Amid public outcry, we believe the new CEO may be compelled to take a less profitdriven approach and refocus the group on its core rail operations to ensure the delivery of a reliable transport service to commuters.

Expect spike in R&M expenses to pose downside risks. We have already cut our FY Mar12-14 EPS estimates by 2-3% in anticipation of a permanent increase in repair and maintenance (R&M) costs to about
10% of the group’s transport-related revenue against the current 9%. With the change in top management, we expect the group’s generous dividend policy to also come under review. A dividend cut seems a real
possibility for the current financial year given the projected earnings slide and higher capex requirement of $600m from the usual $100m.

Switch to ComfortDelgro. We reiterate our Sell call on SMRT with a target price of $1.50, based on 15x blended FY Mar12F/13F PER. For investors who want to maintain an exposure to Singapore’s land
transport sector, we advocate a switch to ComfortDelgro for its more attractive valuation and geographical diversity.