SMRT

SMRT: In response to a query by SGX in regards to its 18.5% jump in its share price yesterday, SMRT has replied that the group is not aware of any news that has caused the price surge. Maybank-KE urges investors to avoid the hype, and cite two possible corporate developments that could have potentially led to yesterday’s spectacular movement: Scenario 1: Nationalisation of SMRT via a general offer – This could allow SMRT to run as a non-profit organisation, although the house think that this is unlikely as Singapore’s Transport Minister had previously argued against nationalisation on ground that nationalisation may lead to higher fares and become a burden on taxpayers. Scenario 2: Favourable transition to new business model for fare-based business – This could be a more likely scenario given that SMRT’s core fare-based business suffered an operating loss of $32m in 2013 and is expected to remain a key drag to profitability in the future. Overall, while a change is imminent, it is highly speculative to conclude that the terms will be favourable to shareholders. In particular, Maybank-KE is concerned over the treatment of the asset purchase obligations under the old rail financing regime (note). In the absence of material announcements, the house advises investors to stay cautious. SMRT trades at a rich valuation of 30x FY15E P/E. The house maintains Sell with TP $0.60.