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THE proposed sale of SMRT Corp's rail assets to the Singapore government may not be such a good deal as the market had earlier expected for the transport operator, OCBC Investment Research said on Monday.
Last Friday, the Land Transport Authority (LTA) said the two have concluded talks and arrived at an agreement on the New Rail Financing Framework (NRFF) to transfer the ownership of the North-South and East-West Lines, the Circle Line and the Bukit Panjang LRT; the operating assets include the trains, signalling system and maintenance equipment.
Under SMRT Trains' new NRFF licence, SMRT will transfer its rail assets to the government for S$991 million or S$1.06 billion after GST (goods and services tax), subject to shareholder approval. In return, it will pay an annual licence fee to LTA for the right to operate the lines for 15 years from Oct 1, 2016, with the possibility of a five-year extension - much shorter than the original 30 to 40 years.
The new NRFF will see all future capital-expenditure obligations transferred from SMRT to LTA, resulting in improved free cash flow.
"NRFF has always been the key catalyst for SMRT, but looking at the details announced, we think it may not be such a good deal for SMRT as market had earlier expected," OCBC's Eugene Chua said, noting that there will be no special dividend from the divestment.
Mr Chua highlighted that the NRFF is structured by LTA to allow SMRT to achieve a composite (fare and non-fare) rail Ebit (earnings before interest and tax) margin of about 5 per cent. But SMRT's composite rail Ebit margins between FY2012 and FY2016 ranged from 9.5 to 23.5 per cent under the current rail financing framework. Under the NRFF, the annual licence charge structure provides a revenue shortfall-sharing and a profit-sharing mechanism based on a tiered Ebit cap starting at 5 per cent and Ebit collar at 3.5 per cent.
"This means any EBIT deviations beyond the cap and collar would be shared with LTA, but LTA's sharing of downside risks will be limited to the license charge payable by SMRT for the financial year," he explained.
His fair value for the stock has been revised to S$1.45 a share from S$1.55 previously.