20160907 SMRT shareholders offered a bad deal by Temasek, company now worth a lot more

CNA’s ”SMRT shareholders to vote on Temasek buyout on Sep 29” expectedly urged SMRT shareholders to vote in favour of Temasek taking over SMRT at $1.68 per share.

CNA’s interest is aligned with Temasek’s because it is owned by Mediacorp, which is in turn 100% owned by Temasek. So much for objectivity.

Five days prior to the takeover offer, the government had injected $991 million of taxpayers’ money to buy over assets of SMRT’s rail assets. Without debt and a new risk-free rail financing model, SMRT will no longer be the same company shackled by tons of debt and hundreds of millions in yearly CAPEX.

Its new rail model is risk free because it only needs to tender for a contract against its ‘competitor’, ie Temasek-controlled SBS Transit. What paper general CEO Kuek will need to do is:
– Work out estimated expenditure
– Factor in profit margin
– Submit tender to the government which has vested interest in Temasek.

Under the New Rail Financing Framework, SMRT will continue to make a guaranteed profit from fare operations, provided there are no major screw ups. But Temasek’s takeover objective was never SMRT’s peanuts fare earnings: it is aiming for its pot of gold from non fare operations, ie non fare EBIT was $115.2 million against revenue of $343.4 million in FY 2015. link pg 37

The bulk of SMRT’s non fare EBIT margin of more than 30% is derived from property rental alone. Profit from property rental has been increasing the most every year.

I will digress a little because SMRT has quietly replaced ‘non fare revenue’ with ‘non rail revenue’ in 2016** . There is a huge difference and SMRT appears to have attempted to  mislead.

The effect of this replacement is to drastically reduce the obscene ‘non-fare EBIT margin’ with a drastically lower ‘non-rail EBIT margin’. Non-fare EBIT margin which was consistently at 34% in FY 2014 and FY 2015 has been ‘reduced’ to 19% in FY 2015 and 22% in FY 2016. (see table below) SMRT owes shareholders an explanation for the sudden deviation. Is this not misleading, some kind of accounting gymnastics?

Year FY 2014 FY 2015 FY 2016
Non fare revenue $312 mil $343 mil NA
Non fare EBIT $106 mil $115 mil NA
Non rail revenue NA $581 mil $615 mil
Non rail EBIT NA $108 mil $133 mil
Non fare EBIT margin 34% 34% NA
Non rail EBIT margin NA 19% 22%

Shareholders should know by now that SMRT is worth more than the $1.68 offered by Temasek because:

– Profit from fare-related operations is as good as guaranteed under the NRFF: SMRT has no competitor.
– Outsized CAPEX will be history.
– SMRT will be debt free/cash rich instead of hundreds of millions in debt.
– Super prime properties handed to SMRT will earn an increasing and guaranteed profits as far as the eye can see.

Considering the fundamental changes of SMRT, especially after the government has privatised profits and socialised costs, SMRT shareholders have been offered a bad deal.

Before FY 2016, SMRT still showed the ‘fare’ and ‘non fare’ revenue breakdown. FY 2015 Annual Report. pg 3, .

‘Fare’ and ‘non-fare’ revenue was suddenly changed to ‘rail’ and ‘non-rail’ in FY 2016. The non-rail EBIT margin is more than 10% lower than non-fare EBIT margin.

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3 Responses to 20160907 SMRT shareholders offered a bad deal by Temasek, company now worth a lot more

  1. Xmen says:

    IMO, the PAP government has finally conceded that MRT privatization was a mistake and it’s now taking steps to nationalize it. Prior to transferring the asset into Temasek, the government injects billions of taxpayer money into SMRT to guarantee future profits. HC and her managers will once again outperform the legendary investor Warren Buffett and laughing all the way to the bank with their bonuses.

  2. Justin Tang says:

    Hi Philip, where do you think SMRT will trade if the offer fails? Might be a good time for shareholders to scoop up the shares when it fails.

    • Phillip Ang says:

      If you are only looking at the current scenario of lowered earnings due to $1 billion plus CAPEX the last couple of years, SMRT is fairly priced by the market at around $1.5. Temasek’s offer then appears to be a good deal.
      Savings in CAPEX and financing costs will add tens of millions at least to SMRT’s profit and increases dividend payout.
      Shareholders should be looking ahead because SMRT’s future is now a lot brighter. PAP has great plans for SMRT which is why Temasek wants not only a piece of taxpayers’ flesh but but all of it.
      Should the takeover be rejected, the government may claw back some non fare profits to prevent a higher dividend paid out to shareholders. However, it has to strike a balance because taking back too much will also hurt Temasek’s earnings.

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