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Broker's take: DBS says SMRT's rail asset swap with LTA 'not a sweet heart deal'

Monday, July 18, 2016 - 15:14
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THE Singapore government's takeover of SMRT Corp's rail assets under the New Rail Financing Framework (NRFF) is no "sweet heart" deal, DBS analyst Andy Sim said on Monday.

THE Singapore government's takeover of SMRT Corp's rail assets under the New Rail Financing Framework (NRFF) is no "sweet heart" deal, DBS analyst Andy Sim said on Monday.

Under the NRFF, which will kick in on Oct 1, 2016, SMRT will dispose of its rail assets to the Land Transport Authority (LTA) for close to S$1 billion. In return, SMRT will pay a licence fee to LTA for the rights to operate the lines. LTA will also share revenue and profitability risks alongside SMRT. The licence period is also shortened to 15 years, from 30 years previously.

Mr Sim said the NRFF will relieve SMRT of the heavy burden of future capital expenditure, estimated to be around S$2.8 billion.

"There are, however, trade-offs. With the risks sharing mechanism, SMRT Trains is required to share profits through a tiered structure (of up to 95 per cent) if earnings before interest and tax (EBIT) margins exceed 5 per cent. On the other hand, LTA will share 50 per cent of the shortfall in the event that EBIT margins fall below 3.5 per cent."

"This provides less volatility to SMRT's future earnings, though it will also limit the upside potential. In addition, we note that risk sharing by LTA is limited to the Licence Charge to be paid by SMRT; LTA is not obliged to subsidise SMRT if operating costs exceed this amount, which would result in losses for SMRT," Mr Sim highlighted.

He believes the market has priced in too much optimism on the NRFF, and will be disappointed with the actual outcome.

"While the NRFF provides sustainability to SMRT's financial obligations, it is not a 'sweet heart' deal," Mr Sim said. His target price for SMRT has been revised downwards to S$1.28 a share, from S$1.53 previously.

SMRT shares remain suspended from trading pending a possible announcement by the transport operator.