RHB maintained a "buy" call on SMRT Corp while raising its target price to S$2.25, citing rail reforms that are likely to take place earlier than anticipated.
"While near-term earnings may remain subdued, we believe the implementation of rail reforms is becoming more of an eventuality," wrote analyst Shekhar Jaiswal in a report. "This would be positive for SMRT as it not only converts its rail business into an asset-light model, but also enables the division to earn a conservative 5 per cent operating margin.
"We estimate the sale of train rolling stock to the government at a 10 per cent discount to book value to translate into S$590 million worth of cash receipts in 2019. This would help SMRT to reduce its debt burden."
RHB estimated that the reforms will be implemented in 2019.
However, near-term earnings may remain under pressure by ongoing losses at its train business and a likely financial penalty for the train breakdown in April and a fatal accident which resulted in the death of two SMRT employees.
Operating losses for SMRT's train business are likely till FY2018, due to high maintenance costs, erosion of train revenue from the start of operations at Downtown Line and lower average fare arising from the 1.9 per cent fare reduction announced last year.
Following the recent train breakdown which was due to a power system failure, this could mean that the train power systems may have to be upgraded. RHB estimated this cost at S$100-150 million, putting additional pressure on SMRT's already leveraged balance sheet.
RHB added: "While we have not factored in any financial penalties, we believe near-term losses for SMRT's train business could increase due to potential government-imposed financial penalties for the unfortunate fatal incident in March and the April train disruption."