SMRT

[Temperament]

I seriously doubt the cost-plus model will bring it to a 10+ cent EPS. My personal opinion is that the govt will try to ensure SMRT achieves an annual ROE of approx. 10% under the new model. This would indicate EPS to be approx. 5-7 cents per year with shareholders getting a 50% payout.

The new model will have to ensure the delivery of shareholder value is matched with ensuring a quality transportation that Singaporeans expect (good transport service and low fares).

The business of SMRT is relatively easy to control since approx. 99% of its revenue comes from Singapore

The problem is who is or still wants to be the largest share holders? If the public is the largest share holders then things may be different. After all it's tax payers money, isn't it?

[CityFarmer]

I seriously doubt the cost-plus model will bring it to a 10+ cent EPS. My personal opinion is that the govt will try to ensure SMRT achieves an annual ROE of approx. 10% under the new model. This would indicate EPS to be approx. 5-7 cents per year with shareholders getting a 50% payout.

The new model will have to ensure the delivery of shareholder value is matched with ensuring a quality transportation that Singaporeans expect (good transport service and low fares).

The business of SMRT is relatively easy to control since approx. 99% of its revenue comes from Singapore

Let's do some number crunching.

Cost-plus model on bus service is not unique, and already available in Australia and London. The industry margin is about 10%, which means 20-30 mil base on SMRT bus operation cost of 228 mil as of FY2013. At the moment, the SMRT bus operation is at a loss of 30 mil, so the net improvement is 50-60 mil. With SMRT outstanding share of 1.5 bil, the improvement is approx 3-4 cents in EPS, on top of FY13's EPS of 5-6 cents.

The SMRT bus segment's asset is 228 mil as of FY2013, base on ROA of 10%, the profit is more and less matching the previous numbers.

(not vested)

[CY09]

Hi,

You need to note that LTA/MOT will not be so generous as they are in the full knowledge that SMRT has cash generating segments in the form of Retail rental and advertising (which SMRT has been excellent in milking). Also, Australia bus model, many operators do not have significant retail renting segment (if memory serves me right). Hence I prefer to see SMRT targeted profitability over the whole range of its biz segments.

Civil servants will not be so nice to SMRT and let them take much profits from bus/train ops along with fat profits from rental. Hence I assumed a 10% ROE for the overall SMRT business because SMRT is in an essential social services, where I believe a lot of public scrutiny will be felt. A 20% ROE (10 cents EPS) will be unlikely as it becomes more beneficial to SMRT shareholders at the expense of public funds (The current govt is paying billions for the creation of DTL and TSL works). A 10% ROE will be a balance between shareholder's and the public interests.

[Dividend Warrior]

Hi,

You need to note that LTA/MOT will not be so generous as they are in the full knowledge that SMRT has cash generating segments in the form of Retail rental and advertising (which SMRT has been excellent in milking). Also, Australia bus model, many operators do not have significant retail renting segment (if memory serves me right). Hence I prefer to see SMRT targeted profitability over the whole range of its biz segments.

Civil servants will not be so nice to SMRT and let them take much profits from bus/train ops along with fat profits from rental. Hence I assumed a 10% ROE for the overall SMRT business because SMRT is in an essential social services, where I believe a lot of public scrutiny will be felt. A 20% ROE (10 cents EPS) will be unlikely as it becomes more beneficial to SMRT shareholders at the expense of public funds (The current govt is paying billions for the creation of DTL and TSL works). A 10% ROE will be a balance between shareholder's and the public interests.

Looks like the LTA needs to do a delicate balancing act......

[Drizzt]

they can go for a cost plus incentive model isnt it

[freedom]

Whatever value created by SMRT utilizing the existing assets(retail or advertising) does not subject to government scrutinizing as they are mostly non-existent before taking over those assets from the government. LTA can charge a higher rental or ask a higher sale value when it divests its assets in the future, but what has done before is done.

The people do not appreciate the model of privately-run public service. They will be in for a surprise when the cost of transportation will be much higher for government wholly owned. The civil servants will not try to risk their own careers to create value from existing assets such as retail or advertising. They are not exactly rewarded to lower the fare for the commuters. However, they are rewarded to keep the commuters happy, who have no idea how much should be the cost(fare is not necessarily the cost. The fare can be very low to make loss, but the loss must be covered by the government, which is from the people).

You can check other government wholly own public service. SP Power does not care to make the electricity tariff lower. They only charge based on their cost, which they can simply base on market price. Is there no way for SP Power to create value from its existing assets to lower the tariff? Sure, there is. But they are not rewarded to take the risk.

[valueinvestor]

They just don't bother to use their initiative. They just want to do the daily routine works and pay collected SIR.

[weijian]

It is indeed a fine-balancing act.

On a macro level, the Gov has to balance between an unhappy electorate vs its own pockets (spending too much on subsidies and the big T earning its $)

On a micro level, the company has to balance between service standards vs the need for a listed private entity to derive its maximum earning power.

With no prior (and most probably future) policy making experience, i would like to humbly suggest that balancing act may be achieved by distributing some of the SMRT shares (~10%) that big T owns, to the electorate. This is similar to what was done for Singtel long time ago. By aligning the interests of all the stakeholders in the equation, it might not be so politically risky to make future changes to the equation anymore.

[CY09]

Hi Freedom,

Isnt SP powers a private organisation as well? If they are privately held, wont they be incentivised to take risks as well?

As to why SP powers are currently unincetivsed to take risk, one reason could be due to its strong profits. SP powers Singapore Division has made 445.3M out of a revenue of 1394.7M. Given this profit margin figures, SP powers do not need to take much risk as they themselves are already generating so much profits for shareholders.

http://www.singaporepower.com.sg/irj/go/...4Sep12.pdf

[Dividend Warrior]

Hi Freedom,

Isnt SP powers a private organisation as well? If they are privately held, wont they be incentivised to take risks as well?

In fact SP powers Singapore Division has made 445.3M out of a revenue of 1394.7M. Given this profit margin figures, SP powers do not need to take much risk as they themselves are already generating so much profits for shareholders. Not much incentive to take additional risk since they are doing so well. Also, SP'powers 1 year ROE is currently 11.1%.

http://www.singaporepower.com.sg/irj/go/...4Sep12.pdf

Does a utility company even need to take risks?

A tech company probably need to take more risks, otherwise it will be made obsolete by its competitors.