A major market concern over SMRT is now finally out of the way. LTA announced last week that a financial penalty of S$5.4m will be imposed on SMRT for the 7 Jul system-wide disruption on North-South and East-West Lines (NSEWL). After thorough investigations, LTA concluded that the disruption could have been prevented if not for SMRT’s maintenance lapses. Coupled with the fine, we believe SMRT has learned its lesson and expects it to ramp up maintenance processes to prevent future lapses. Also, with a common interest of ensuring minimal rail services disruption going forward, rail reform will free up SMRT’s free cash flow by removing SMRT’s capex obligation and allows it to focus on ramping up maintenance processes. In our view, with Singapore’s GE15 over and the new transport minister appointed, we do not rule out the possibility that the rail reform could potentially be accelerated. Keeping our forecasts unchanged, we reiterate BUY with FV of S$1.45.
LTA to fine SMRT S$5.4m for train breakdown on 7 July
A major market concern over SMRT is now finally out of the way. LTA announced last week that a financial penalty of S$5.4m will be imposed on SMRT for the system-wide disruption that affected more than 400k commuters on North-South and East-West Lines (NSEWL) on 7 Jul 15. After thorough investigations, LTA concluded that the 7 Jul disruption could have been prevented by SMRT if it had rectified immediately the water seepage detected in mid-Jun, since the water leakage dripping onto trackside equipment was the root cause of the breakdown. As a result of SMRT’s maintenance lapses, LTA found SMRT fully responsible for this serious incident. While the market had been concerned that LTA may hit SMRT with the maximum fine at 10% of its FY15 revenue (S$64m), we highlighted previously (15 Jul) that a lower penalty is more likely and went on to incorporate a potential fine amount closer to S$20m for FY16. Coupled with the fine, we believe SMRT has learned its lesson and expects it to ramp up maintenance processes to prevent future lapses.
Rail reform may potentially come sooner than expected
Again, we highlight that both LTA and SMRT have a common interest of ensuring minimal rail services disruption going forward. Hence, it makes logical sense for LTA push for the rail reform as it frees up SMRT’s free cash flow by removing SMRT’s capex obligation to buy new trains to meet ridership growth. In addition to improved finances, it rail reform also allows SMRT to focus on getting its preventive maintenance processes on track to prevent future occurrence of massive disruption. In our view, with Singapore’s General Election 2015 (GE15) over and the new transport minister appointed, we do not rule out the possibility that the rail reform could potentially be accelerated. However, note that we have yet to factor in the impact of the rail reform.
Forecasts unchanged; reiterate BUY
We believe our conservative assumptions (i.e. potential fine and higher repair & maintenance expenses) last updated on 27 Aug is more than adequate for now. Hence, we opt to keep our forecasts unchanged and reiterate BUY with FV of S$1.45.
A major market concern over SMRT is now finally out of the way. LTA announced last week that a financial penalty of S$5.4m will be imposed on SMRT for the system-wide disruption that affected more than 400k commuters on North-South and East-West Lines (NSEWL) on 7 Jul 15. After thorough investigations, LTA concluded that the 7 Jul disruption could have been prevented by SMRT if it had rectified immediately the water seepage detected in mid-Jun, since the water leakage dripping onto trackside equipment was the root cause of the breakdown. As a result of SMRT’s maintenance lapses, LTA found SMRT fully responsible for this serious incident. While the market had been concerned that LTA may hit SMRT with the maximum fine at 10% of its FY15 revenue (S$64m), we highlighted previously (15 Jul) that a lower penalty is more likely and went on to incorporate a potential fine amount closer to S$20m for FY16. Coupled with the fine, we believe SMRT has learned its lesson and expects it to ramp up maintenance processes to prevent future lapses.
Rail reform may potentially come sooner than expected
Again, we highlight that both LTA and SMRT have a common interest of ensuring minimal rail services disruption going forward. Hence, it makes logical sense for LTA push for the rail reform as it frees up SMRT’s free cash flow by removing SMRT’s capex obligation to buy new trains to meet ridership growth. In addition to improved finances, it rail reform also allows SMRT to focus on getting its preventive maintenance processes on track to prevent future occurrence of massive disruption. In our view, with Singapore’s General Election 2015 (GE15) over and the new transport minister appointed, we do not rule out the possibility that the rail reform could potentially be accelerated. However, note that we have yet to factor in the impact of the rail reform.
Forecasts unchanged; reiterate BUY
We believe our conservative assumptions (i.e. potential fine and higher repair & maintenance expenses) last updated on 27 Aug is more than adequate for now. Hence, we opt to keep our forecasts unchanged and reiterate BUY with FV of S$1.45.
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