SMRT, SBS shares soar as Khaw ignites revamp hopes

Singapore

THE share prices of SBS Transit (SBST) and SMRT Corp, typically lightly traded, surged on Friday after Transport Minister Khaw Boon Wan suggested that the regulator, the Land Transport Authority (LTA), would also oversee train operators' assets, igniting speculation that a sector revamp is imminent.

The unusual price movements prompted the Singapore Exchange (SGX) to query both companies.

SBST, which runs the newer Downtown MRT line, led the rally, rising to its highest level in more than four years; its shares gained 9.4 per cent to S$2.10, its highest intra-day price since February 2011. The shares closed at S$2.02, up 10 cents, or 5.21 per cent. About 245,000 shares were traded.

SMRT, Singapore's largest train operator, rose 6.4 per cent on speculation that a revamp could potentially unlock about S$1 billion of its assets. The shares ended at S$1.56, up 8 cents or 5.41 per cent; more than eight million shares changed hands.

UBS analyst Cheryl Lee said in a note: "Given the increasingly frequent breakdowns, we reckon this (the restructuring of the rail industry) will happen soon - which will be positive for SMRT. Mr Khaw's comments suggest that something is in the works. We may see some major initiatives in the first six to nine months of his watch."

UBS has a buy call on SMRT, with a target price of S$1.80 a share.

Responding to SGX's query, SMRT said it was unaware of fresh information which could have affected trading. "As previously announced on Oct 27, we are continuing our discussions with the authorities on the transition to a new Rail Financing Framework and progress is being made," it said.

Under the existing financing framework, rail operators own the operating assets of the system and are responsible for buying additional trains to meet ridership growth.

SBST, on its part, pointed to a May 21 statement by the LTA, which said it would "negotiate with the incumbents to run the nine packages under the contracting mode". "When finalised, an announcement will be made accordingly," SBST said.

Speaking at Friday's forum on infrastructure maintenance, Mr Khaw, who took over the troubled transport portfolio in September, again hinted at a restructuring, calling for a "One Team" approach to raising rail reliability. He called on the LTA to beef up its pool of engineers to take on operations and maintenance.

"They must establish a team that is able to take on operations and maintenance, if we decide to move in that direction," said the minister, who is also Coordinating Minister for Infrastructure.

He had made similar remarks a few weeks ago about this integrated approach in a blog post, where he set out a seven-element strategy entailing an immense multi-year effort from the LTA, SMRT and SBST.

Most analysts said they believed that the government will eventually take over SMRT's rail assets, and fund future capital expenditure to ensure network reliability; this will turn SMRT into a pure operator.

This is crucial, given that mounting maintenance and repair costs, as well as the need to upgrade the ageing network, make it unsustainable for SMRT, a listed entity already bogged by a weak balance sheet from recent breakdowns. SMRT has indicated that maintenance costs will go up from 41 per cent to 50 per cent of rail revenue.

UBS's Ms Lee estimated that rail losses could spike to between S$70 million and S$75 million from S$10 million to S$15 million, wiping out most of SMRT's FY16 profits.

"We reckon the government will consider the total cost of running the trains and also take into account the rental/advertising revenue to arrive at a feasible return. We reckon a margin of 10 to 12 per cent is possible," she said.

She added that a revamp could lead to a jump in SMRT's discounted cash flow as it would no longer have to fund the rail capex.

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