Broker's take: RHB says Temasek's offer fairly compensates SMRT shareholders

GIVEN the near-term cost headwinds and uncertainty on rail fares and ridership, investors should accept Temasek Holdings' S$1.20 billion buyout of SMRT Corp, RHB Research Institute Singapore said on Thursday.

This is because SMRT may earn less than 5 per cent margins under the New Rail Financing Framework (NRFF), analyst Shekhar Jaiswal said.

SMRT is expected to face challenges such as costs and uncertainties associated with an ageing rail network. It will also need to deliver greater rail reliability and services under the NRFF.

"We believe the offer fairly compensates shareholders for an expected return that the stock will generate in the next 12 months," Mr Jaiswal said, noting that the offer price does not include the 2.5 Singapore cents a share for the final dividend for FY2016.

"If the offer fails, Temasek may not be able to make another offer for the next one year," he said.

Temasek's wholly owned Belford Investments made an offer to SMRT on July 16, a day after details of the NRFF were unveiled. The offer is pegged at S$1.68 cash per share, by way of a scheme of arrangement. One of the conditions to be satisfied is to get SMRT's shareholder approval (excluding Temasek) through a scheme meeting.

The analyst said unhappy investors should make themselves heard. Temasek will abstain from voting on the offer. In addition to receiving a sanction from the court and an in-principle approval from Singapore Exchange, approval of the offer requires more than 50 per cent of the shareholders present and voting at the meeting to approve the offer. Those voting in favour of the offer at the meeting must own at least 75 per cent of the shares by value that vote at the meeting.

"As this is not a general offer, investors who abstain from voting will have no say in the final outcome of the voting process," Mr Jaiswal said.

Temasek's offer will have no impact on the implementation of NRFF, he said. "SMRT and Temasek view NRFF as a necessary regulatory transition. The offer made by the latter to take the former private does not affect the implementation of the framework."

SMRT will soon announce the extraordinary general meeting (EGM) date to seek shareholders' approval for NRFF implementation. Temasek intends to vote in the favour of NRFF at the EGM.