SMRT

SBS Transit have to buy over the NEL/SKPLRT's operating assets (close to S$1bil??) from LTA one day. However, with the new rail framework, it is most likely out of the question.

Temasek will privatise SMRT but holding SMRT in its portfolio is not a great idea since it is basically a deadweight with no growth.
They will strip out cash and inject the company at a later date into an infrastructure fund??

There is some growth from CPI and ridership. And rental growth.

(19-07-2016, 05:35 PM)yeokiwi Wrote: Temasek will privatise SMRT but holding SMRT in its portfolio is not a great idea since it is basically a deadweight with no growth.
They will strip out cash and inject the company at a later date into an infrastructure fund??

By definition, an infrastructure fund has to hold hard assets like bridges, roads, railways, ports etc. SMRT will only be a manpower contractor without any hard assets, and would not qualify. If SMRT gets privatized it seems unlikely that it will get listed again, as that would bring back all the shareholder-vs-commuter conflict of interest that led to all the breakdowns to begin with.

(19-07-2016, 02:29 PM)d.o.g. Wrote: WARNING: LONG POST

IMHO the government has finally realized that profits and public services are incompatible. Many observers will say that this is common sense, but common sense is not very common.

So what can the government do? It can simply buy back the hard assets and leave the operating company as a listed entity. The problem here is that there will be a lot of cash trapped in the operating company after the sale of the assets.

A special dividend would invite public anger because it will be seen as a reward to a small group of shareholders at the expense of the general public. So the money cannot be paid out. Yet, it is patently obvious that the operating company will be nothing more than a manpower contractor.

How can you possibly spend $1bn as a manpower contractor? You have no need for capital expenditure, and salaries can be recovered from the government so at most you need only 3-6 months of salary as working capital. And since your payments from the government are guaranteed you could even borrow the salary money very cheaply. So the $1bn cash will be trapped. The only way to recover the cash is to privatize the company.

The same logic applies to SBS Transit. Recently some "investors" have driven up the share price of SBS Transit after the news regarding SMRT. This is utterly stupid because SBS Transit has no rail assets to sell. It never paid for the Northeast Line to begin with so there is nothing to sell. But SBS Transit does have a lot of buses. Again, a special dividend is politically impossible. Therefore a privatization is the most likely outcome. This will allow the government (in the form of Temasek) to recover the cash. Left pocket to right pocket, as some would say.

Once both SMRT and SBS Transit are fully privatized, Temasek can restructure them so that they can compete to operate both trains and buses as per the new contracting model. SMRT and SBS Transit could also merge, with the merged entity (SBRT?) competing for contracts against foreign operators like Tower Transit and Go Ahead.

When such a perspective is adopted, it becomes clear why the allowed operating margin is only 3.5-5%. A high margin would make SMRT (and SBS Transit) more valuable and thus more expensive to privatize. A low margin will also score political points as the government will be seen to be pro-people, always a good thing to store in the vote bank for future elections.

As usual, YMMV.

Just like to point out that ComfortDelgro owns 75% of SBS Transit and neither Temasek nor GIC is the top shareholder of ComfortDelgro. It is unlikely that SBST will be privatised by the government.

(19-07-2016, 05:35 PM)yeokiwi Wrote: Temasek will privatise SMRT but holding SMRT in its portfolio is not a great idea since it is basically a deadweight with no growth.
They will strip out cash and inject the company at a later date into an infrastructure fund??

LTA's bail out will mean that the money for the 24 trains to be paid to LTA (under the 600+ mil payables on the BS) and purchasing of CCL assets in 2019 does not need to be carried out anymore.


Based on SMRT FY16 results to calculate its future profit/ROE:
(1) EBIT = 5% of FY16 total revenue minus taxi operations + taxi EBIT
             = 0.05*(1296-147) + 17
             = 57.5 + 17  = 74.5mil
(2) Assume no more interest costs, PATMI will be purely calculated from EBIT after 17% corporate tax = 0.83*74.5 = 61mil
(3) Since NTA remains relatively unchanged after divestment (WAS: 59.21 cents, IS: 59.44 cents), with equity of 915mil, the ROE is ~6%. Not exactly a business with great returns, even after accounting that there is no more interest to pay.
(4) But as d.o.g mentioned, it has close to 1billion (or 915mil) that it can try to continue to strip off.
(5) Let's say it decides to divest the taxi business as well and then sells everything at balance sheet valuation, the remaining assets left will be ~250-300mil left. The ROE will increase to ~16%. It is not exactly an excellent business but would be a decent cashcow for Temasek to hold in its portfolio.

If you do a proper calculation, SMRT is probably overpriced at the current share price. Investors have priced in a much better scenario than LTA offered.

My estimation of new ebit is around 60-80 million, which easily works out to be more than 20x EV/EBIT.

Even if SMRT were to leveraged up to around 5x EBIT, that will only be a 400-600 million payout as compared to a market cap of $2.3 billion. With only a 15 years contract and no real assets, I highly doubt SMRT can afford a higher leverage like it used to.

The new framework is also such that there is very limited upside to the profit under the new framework unless there is organic growth in revenue (unlikely that fare hike will occur more frequently).

For bidding of new line, the government is also likely to introduce more competition since that is the point of the new structure.

To me it does not make commercial sense as to why Temasek will want to privatize the company at the current price, unless it is for non-commercial reason. Once privatised, Temasek accounts for their private companies return using growth in book value, so it is pretty easy to be "held accountable" for its investments.

(19-07-2016, 06:41 PM)d.o.g. Wrote:

(19-07-2016, 05:35 PM)yeokiwi Wrote: Temasek will privatise SMRT but holding SMRT in its portfolio is not a great idea since it is basically a deadweight with no growth.
They will strip out cash and inject the company at a later date into an infrastructure fund??

By definition, an infrastructure fund has to hold hard assets like bridges, roads, railways, ports etc. SMRT will only be a manpower contractor without any hard assets, and would not qualify. If SMRT gets privatized it seems unlikely that it will get listed again, as that would bring back all the shareholder-vs-commuter conflict of interest that led to all the breakdowns to begin with.

HK MTR is listed and I am sure they also have to manage shareholder-commuter conflict. Other businesses also have shareholder-customer conflict.

Is LTA making SMRT pay (5% EBIT cap) for the underinvestment during the reign of 'Cleopatra'? Haha

(19-07-2016, 02:29 PM)d.o.g. Wrote: How can you possibly spend $1bn as a manpower contractor? You have no need for capital expenditure, and salaries can be recovered from the government so at most you need only 3-6 months of salary as working capital. And since your payments from the government are guaranteed you could even borrow the salary money very cheaply. So the $1bn cash will be trapped. The only way to recover the cash is to privatize the company.

Based on current share price, the $1bn is not enough to pay for shares that Temasek does not own (~700 mil shares x $.150), let alone pay off debts.