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SMRT: Quiet re-nationalisation

In Infrastructure, Political governance, Temasek on 06/05/2012 at 7:34 pm

(Or “SMRT: Has the government and WP switched positions on the quiet)

On Friday, SMRT reversed its recent losses and was up 0.9% to 1.65. It was at 1.81 juz on 24 April.

Interestingly among the slew of brokers’ reports calling it a “sell”, “nationalisation” seems to be a dirty word, never raised except by two honourable brokers. Only Citigroup was willing to hint at re-nationalisation, “We’d even dare conjecture a Government-led end game, while only Kim Eng suggested that “selective nationalisation” is already taking shape, “A hybrid model, where the Government comes in to inject money, is perhaps the best model possible under the circumstances … like selective nationalisation where the Government pumps in money in certain areas … being done already – take for example, the Government co-paying for the buses to help operators expand the fleet.”

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,

And only Citigroup is willing to hint at, “We sense more drastic actions are needed, perhaps raising capital to shore up finances.” In simple English, it says a rights issue is possible. Everyone else was silent on this pink elephant in the room.

I think a rights issue is very highly probable.

Let’s go thru some numbers. At Friday’s close, the mkt cap of SMRT was $2.49bn., of which $1.35bn can be attributed to Temasek (It owns 54.3% of SMRT).

Now SMRT has plans to spend $900m over the next eight years and it wants LTA (i.e. the taxpayer) to share the cost. What if the government tells SMRT that it shld fund two-thirds of the cost because the Commission of Inquiry finds that SMRT was not maintaining the tracks properly. (I’m assuming the COI makes this finding based on the way the inquiry is going).

To fund this $600m, SMRT’s directors call for a deeply discounted rights issue to raise $600m (about 24.1% of SMRT’s mkt cap as of Friday). Add to that they say that dividends will have to be cut drastically*, and that Temasek has agreed to underwrite any shares that minority shareholders refuse to take up. Temasek will say that its decision to support the rights issue is a “commercial decision” of a long-term shareholder. Right, and pigs can fly, a leopard can change its spots, KennethJ and TJS can stop boasting, Chiam can renew the SPP’s leadership, and Yaacob can tame the internet tsunami by building a CoC flood wall.

In such a scenario, Temasek could end up with 75-80% of SMRT, as many minority shareholders decline to take up their shares because of the reduced dividend payments.

Ain’t this partial re-nationalisation? And Temasek can have its cake and eat it too, depending on whether the other shareholders subscribe to the rights. Since SMRT was listed in 2000, Temasek has received $694.3m in dividends (I’m including the dividend declared recently). A $600m rights issue and assuming it has to take up all the rights shares still leaves Temasek $94.3m ahead. Might as well make it $700m rights call then, shall we?

Ain’t nationalisation of the public tpt system in the WP’s manifesto (I’ve blogged on this and that the transport minister parrots his predecessors’ defence of the rojak “for profits” system). Lucky Tan has this video of my friend Eric Tan then a WP member (and treasurer) talking abt nationalisation at the last GE. So the silence of the WP which I’ve raised before) is strange, and in the longer term worrying (No can trust its manifesto promises, why shld voters trust the WP?).

So I hope in the May session of parly, GG for one can raise the issue of nationalisation and put the government on the defensive. Why GG? In July last yr, he wrote this on nationalising the public tpt system. This was after Eric Tan had left WP in a huff, so the call for nationalisation of the public tpt system did not end when Eric Tan left.

If the WP remains silent on nationalisation of the public tpt system, it would remind me of a Sherlock Holmes mystery:

Detective: “Is there any other point to which you would wish to draw my attention?”

Holmes: “To the curious incident of the dog in the night-time.”

Gregory: “The dog did nothing in the night-time.”

Holmes: “That was the curious incident.”

BTW, OCBC (a ex-bull on SMRT) is still relatively bullish. It downgraded SMRT to hold from “buy” and lowered its target price to S$1.71 from S$2.04, citing weaker-than-expected earnings for 2012 because it estimated that SMRT’s capital expenditure in 2013 will rise to S$500 million due to higher expenses needed for upgrading its assets.

CIMB cut its target price from $1.68 to $1.50, suggesting a switch to ComfortDelGro to maintain an exposure to the land transport sector. Deutsche cut its target price to $1.61 from $1.75 while J P Morgan downgraded the stock from “overweight” to “neutral” with a target price of $1.60. Phillips cut its target price to $1.33, maintaining its “sell” call. I suspect Phillips is right. A rights issue will be priced at around the $1.33 level.

I’d buy some shares then. Never bet against Temasek when it comes to a local counter.

——

*”Some [analysts] expect SMRT to cut its dividend payout from 70-80 per cent of profits historically to at least 60 per cent.” (BT). What if this was reduced to 25%?

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  1. Why do they have to worry about money. Rights Issue and money will start to roll in. No difference from U.S. printing more of their dollars, except we issue paper for cash. NEED MORE JUST ISSUE MORE PAPERS. For a company with almost zero investment and yet need to have injected fund is unimaginable. IF FARES COLLECTED IS NOT ABLE TO SERVICE THEIR OPERATIONS I DARE SAY THEY MIGHT AS WELL STOP THER OPERATIONS.

  2. [...] Singapore’s World Class Public Transport – Thoughts of a Cynical Investor: SMRT: Quiet re-nationalisation [...]

  3. This much I agree… WP always back off at the critical juncture. Very disappointing. But no fish, I can settle from the shrimp. What else can I do, as an Aljunied GRC resident? Vote for PAP “ironically”?

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