SMRT

SMRT (S$1.515): Is market jumping the gun over potential rail takeover by LTA?

CIMB cautioned about excessive optimism after SMRT surged 5.4% last Fri amid a speech by Transport Minister Khaw Boon Wan fuelled speculations that the government may take over the rail operations on favourable terms.

During an infrastructure forum on 4 Dec, Mr. Khaw highlighted that the Land Transport Authority (LTA) must establish a team to take on rail operations and maintenance, spurring talks that the government may nationalise Singapore’s rail operators.

While the house acknowledges that SMRT would benefit if it can unlock capital from its rail assets, it sees two key obstacles that hinder the group from receiving favourable terms for a potential asset transfer to the government:
1) SMRT’s asset purchase obligation of $2b under the old rail regime to buy over rail assets from the LTA between 2014 and 2019
2) Government’s objective to juggle interest of the general public and rail operators

These factors are expected to handicap the group during future negotiations for a possible handover of rail operations to the LTA.

Consequently, the foreign broker warned that terms for a potential rail asset transfer could turn out unfavourably for SMRT and the recent surge in share price suggests market may be overly bullish.

The house reiterates its Reduce rating with an upward revised TP of $1.37.