SMRT

Kim Eng on 3 June 2014

• An asset-light, fare-independent model announced for bus may also apply to rail, auguring well for SMRT.
• Our scenario analysis suggests a wide range of valuation outcome post-transition: Bull= SGD2.09, Base= SGD1.36, Bear= SGD0.98.
• Rating raised to HOLD with a higher TP of SGD1.36.

Revisiting our investment thesis post bus transition news
With bus operations on track for a fare-independent, asset-light model, we envisage a similar operating model for rail. In our view, this is a sustainable solution that allows the government to inject additional capacity and implement fare adjustments without affecting the profitability of the operators.

In our view, three key variables will drive SMRT’s valuation post-transition: 1) cash surplus from asset sales, 2) treatment of previous contractual agreements, and 3) retention of rental concessions. Over time, we expect the market to price SMRT on a premium P/E of 17x as it transits to a more sustainable and asset-light model. Using this as a valuation basis, we derive the following post-transition TPs: Bull= SGD2.09, Base= SGD1.36, Bear= SGD0.98.

Rail transition key positive for SMRT; upgrade to HOLD
The wide range of outcomes suggests challenges in deriving post-transition valuation without any concrete details. Furthermore, the valuation outcomes are highly sensitive to margin assumptions. Taking a leaf from the public bus transition, we expect a favourable rail transition to benefit SMRT the most. We therefore upgrade SMRT to HOLD and raise our TP to SGD1.36 (previously SGD0.80), based on our base case scenario.
Key risk to our call: An unfavourable rail transition.