Analysts express concerns about its financial health and moot possibility of re-nationalisation
04:46 AM May 03, 2012
SINGAPORE - Following the release of SMRT's full-year results earlier this week, analysts have painted a bleak picture of the financial health of the troubled transport operator, with a Citigroup report even going so far as to suggest that re-nationalisation could be on the cards.
In their report, Citigroup analysts Robert Kong and Ivan Lim said they expect SMRT's balance sheet to tumble from a net cash position to net debt of more than 80 per cent of equity by the 2014 fiscal year, as capital expenditure exceeds operating cash flow.
They said: "Having hurt commuter confidence with multiple service disruptions, SMRT also faces zero fare increase this year in a time of rising energy/staff costs and inflation.
"Yet the Government continues to push an agenda of curbing private transport forcing more traffic onto an already-overloaded rail network. Thus we sense more drastic actions are needed, perhaps raising capital to shore up finances. We'd even dare conjecture a Government-led end game."
On Monday, SMRT reported that its full-year net profit fell 25.6 per cent to S$119.9 million. It added that higher costs of repair and maintenance, energy and staff will continue to hurt its profitability for the next 12 months. Last week, SMRT also announced plans to spend S$900 million upgrading its rail network over eight years,
Concerns over SMRT's financial health were shared among the brokerages - at least five have a "sell" or "underperform" call on the stock - with some suggesting that it will no longer be business as usual: UBS said SMRT is highly likely to move to a new rail-network financing framework where it would pay the Government for an operating lease instead of owning train assets, while Maybank Kim Eng suggested that "selective nationalisation" is already taking shape.
Maybank Kim Eng Securities analyst Bernard Chin told Today: "A hybrid model, where the Government comes in to inject money, is perhaps the best model possible under the circumstances. It would be like selective nationalisation where the Government pumps in money in certain areas. In fact it is being done already - take for example, the Government co-paying for the buses to help operators expand the fleet."
Nevertheless, CIMB research vice-president Lee Wen Ching said that chances of re-nationalisation of SMRT are low. "It is more likely that the current business model is improved, rather than a complete overhaul," she said.
Pioneer Member of Parliament Cedric Foo, who chairs the Government Parliamentary Committee for Transport, pointed out that re-nationlisation of SMRT would not only cost the Government a lot of money, it may not address the root of the problem.
Describing it as a "wild suggestion", Mr Foo said: "If the Government takes over, who will we employ? The same old workers. It won't solve the underlying problems, which is probably that maintenance processes should be upgraded."
Mr Foo also pointed out that in any business, "replacing and maintaining assets is not unusual". He added: "The capital outlay is not going into the drain as SMRT will get returns from re-investing."
Yesterday, SMRT shares fell to a seven-month low, before closing 1.2 per cent lower at S$1.66.
While SMRT is considered by investors to be a "defensive stock" - providing a constant dividend and stable earnings regardless of the overall state of the stock market - analysts, however, said investors have to brace themselves for lower dividends.
A CIMB Research report said: "Plagued by margin erosion and cashflow strains, we see no reason to own this stock. Further, dividend yields are no longer attractive."