Why SMRT and SBS Transit Prices increase/surge?

4/26/2014 10:00:00 AM Stock Picks

If you haven't notice, the prices of SMRT and SBS Transit soared to S$1.205 and
S$1.315 respectively, up almost 20% from wednesday (23 Apr) closing prices!!

SGX has also launched an investigation/query to investigate on the unusual trading
activity.

But what actually happened... I received an analyst report stating 2 possible
reasons:

Scenario 1



Railway Financing Framework in place - Highly possible The house believes that
SMRT is making inroads with regulators regarding the accounting of asset transfers
under the new rail-financing framework. This is assume to be very close to a
conclusion.

In short, the end result will be a predictable cash flows and a more sustainable
financing model, which will alter the fate of the company. Under the new rail
financing framework, LTA will collect a licence charge that the operator will pay for
the right to run and generate returns from the revenue service. The monies received
will be pooled together to replace and enhance operating equipment such as trains,
signaling systems and other operating assets for operating the Railway Transport
System (RTS).

The licence charge comprises fixed and variable components. The fixed component
is calibrated to take into account factors such as the viability of the line, its long-term
operational and maintenance needs, and the benefits and costs that the line is likely
to bring to/impose on the rest of the railway network. The variable component
ensures the appropriate level of risk-sharing between government and the operator.

CIMB modelled in significant amount of service enhancement works that would be
completed within the next 24 months, related costs would taper, leading to margin
recovery in FY15F. As such, the house sees a 36% yoy improvement on core net
profit (FY15 net profit S$84m).

The shift/change in business model (to cost-plus model, if indeed this happen) will
would also go a long way into reversing SMRTs bus losses 12-18 months from
now and significantly improve margins, earnings and cash flows. This should help
mitigate the incremental costs required to improve the other related opex, which are
currently causing severe the cost-revenue misalignment.

Scenario 2: Nationalization of SMRT

- Lower possibility Though not ruled out entirely, is the possibility of nationalizing
the company. CIMB however do not think it is in the interest of the government to
own back the company, and subject itself to further abuse from disgruntled
commenters whenever trains breakdown, or fare increase is necessitated.
Email ThisBlogThis!Share to TwitterShare to Facebook
Newer Post Older Post Home