SMRT

Phillip Securities Research, June 4

THE Land Transport Authority (LTA) announced on May 28 further details on the new Government Contracting Model (GCM) pertaining to the first package being put up for tender in H2 CY2014.

Conversion of operating losses to operating profits: The change in bus model is positive for SMRT for the period between H2 CY2016 to 2021, as it converts a loss-making fare-revenue business to one that is profitable and without ridership risk. Hence, we should see revenue keeping pace with costs.

Lower barriers to entry, heightened competition: From 2021 onwards, after the first contract period has ended, SMRT will have to bid competitively in order to retain market share.

Market has already priced-in this development: The price of SMRT had already surged upwards even before the official announcement and we now believe that the effect of the new Bus GCM has largely been priced-in already. We also think that the estimated dividend yield of 1.5 per cent based on current price is not attractive.

With improved visibility of earnings, we make use of DCF valuation method to derive new target price of $1.390. We upgrade SMRT to "reduce" rating in view of the new GCM which has materialised, but note that it comes into effect only after August 2016.

REDUCE