SMRT

SMRT: Expectations for rail reform have been growing since more details on the government contracting model under bus reforms were announced. While ComfortDelgro is the likely main beneficiary of bus industry overhaul, Maybank-KE cautions against over-optimism in SMRT. Last week, LTA revealed that SMRT has financial obligations of up to $2b between now and 2019. The commitments include train additions to the NSL, EWL, CCL and Bukit Panjang LRT, as well as the resignaling project on NSEWL. Maybank-KE estimates this translates to about eight years of operating cash flow or 2.5x its current equity base. During the same meeting in Parliament last week, transport minister Lui Tuck Yew hinted that SMRT’s proposed price is too high, and “there remains a wide gap between SMRT’s expectations and LTA’s position”. LTA considers both value of existing assets and current and future capital expenditure obligations in its valuation. Adding to the confusion, under the existing license which expires 2019, SMRT is required to buy the rail assets from LTA. AS such, Maybank-KE believes that upside for SMRT from potential rail reform may be limited. First, asset acquisition by LTA may not be a large bonus. Second, rail operations are already profitable with rental concessions, unlike bus operations that have been running persistent losses. Third, the 60% YTD price rally may have already factored in the potential positives. The street is equally divided with 4 Buys, 4 Holds and 4 Sells. Maybank-KE reiterates its Hold rating for SMRT with TP $1.36.