8 quick things I learned from SMRT’s AGM 2014

SMRT has been hitting the news recently for good and not-so-good reasons.

First off, the public transport operator announced that they’ll be adding free charging stations at four MRT stations for commuters to charge their electronic devices. Nothing groundbreaking but a nice touch nonetheless.

On a more serious note, it was reported in that the company will be fined $1.6 million by Singapore’s Land Transport Authority (LTA) for four train service disruptions this year.

And the biggie – SMRT revealed that they suffered a $25 million loss on its core business of operating trains and buses for the financial year ended 31 March 2014.

This piece of news might come as a shock to us as commuters because I’m sure we only seem to remember the many times when we grudgingly accepted SMRT’s fare hikes over the years. However, according to SMRT’s CEO, Desmond Kuek, fares have only increased by 6% over the last 13 years and the cost of operating the business finally caught up with SMRT in the end. This is doubly surprising given that SMRT is already one the most efficient and effective public transport operators by international benchmarking standards.

At this year’s AGM, SMRT’s chairman, Koh Yong Guan stated:

“It is increasingly unsustainable for us as an operator and things must change.”

In the face of such heavy losses in SMRT’s core business, it is inevitable that we’re going to see another round of fare hikes soon. And this time maybe, we may need to accept them as necessary for the business to continue operating in a sustainable manner.

The company has also been in active discussions with the authorities to sell its capex-intensive rail assets over to the Singapore government. If the proposal is accepted, SMRT will drastically reduce its $650 million annual capital expenditure and no doubt improve its bottom-line. SMRT stock has already surged by over 50% in the last three months in anticipation of this potential move – even though nothing has been confirmed.

The Management Quadrant

m-quadrant

I attended this year’s AGM to find out more about SMRT, its business fundamentals and its overall outlook over the next few years. I also wanted to assess SMRT’s management and how they handled any tough questions posed by shareholders. As you may, or may not, already know, evaluating a company’s management team is one of four quadrants (Business, Management, Financials, & Valuation) you need to analyze before you invest in a company.

At times, you can evaluate a company’s management by going through annual reports and taking notes of their decisions and behavior over the years. Their actions over a period of time will give you a good clue on how talented, honest, or shareholder-friendly a company’s management is.

But in addition to that, being able to meet management live in person where you can assess them personally and pose them questions can be vitally important as well, and that’s where attending AGMs comes in!

What that said, here are…

The 8 Key Takeaways I Learned From SMRT’s AGM 2014:

  1. During my annual tour of AGMs, I oftentimes see Mano Sabnani, a former newspaper editor and now fulltime investor. Mano is known for his humor and the sometimes insightful questions he poses to management at the various AGMs he attends. And at this AGM, Mano was unsurprisingly the first to raise his hand. Mano noted that, according to a Business Times article, there is a disagreement on the rail asset valuation between the LTA (who want future rail expenditure to be deducted from current valuation) and SMRT (who want to sell based on current asset valuation). SMRT’s chairman declined to publicly comment on the ongoing negotiation, instead he offered three guiding principles in any negotiation: 1) interest of shareholders, 2) seek an outcome that is mutually equitable and sustainable and 3) the company must make at least a fair profit from the outcome.
  2. Under the new rail financial framework proposal, SMRT management is confident in retaining control over its existing retail space along its rail network that have been producing healthy margins for past few years, though this is yet to be finalized.
  3. SMRT might lose its near-monopoly of the rail business in Singapore once the new train lines are opened (the rail network is expected to double by 2030). However, the management remains confident of winning the bids to operate the new lines against its competitors. Existing lines which are already under SMRT’s umbrella are not subject for contest which means SMRT will not lose any of its existing lines.
  4. Neither SMRT nor SBS Transit are currently represented on the transport council. This puts SMRT in a hard position to renegotiate any change in fare prices. The two operators are instead invited to justify in writing to the transport council before they can implement any change in fare prices.
  5. A huge overhaul of the Singapore public bus system will take place over the next few years. 20% of all bus routes will be up for tender in the next two years and the remaining 80% in 2016 when SMRT’s current license expires. The routes will be tendered out to both local and foreign operators and not just to Singapore’s incumbent duopoly – SBS Transit and SMRT. SMRT is confident though of winning the tenders owing to its many years of operational experience.
  6. The concrete sleeper replacement programme for its aging network of North-South line tracks is now 35% completed. SMRT aims to complete them by 1H2015. Together with 13 new trains to be delivered this year, as a commuter you can expect less train delays and save more time commuting.
  7. The newly incorporated company, Singapore Rail Engineering, will bid for local and foreign rail engineering projects in the mid-term. Management expects this new company to quickly contribute to its bottom-line.
  8. Lastly, despite challenges in its core business last year, SMRT still achieved an overall profit of $61.9 million, contributed primarily by its taxi operator, engineering services and businesses. Maybe we should reconsider that fare hike! Haha.

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Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

12 Comments

  1. Tan K S

    July 26, 2014 at 9:43 am

    Let’s all not be naive. SMRT is NOT losing money. In finance, it’s how you manipulate the figures to your favour.

  2. LeeYJ

    July 30, 2014 at 11:20 pm

    Hi, how is the capex reduction can help improves its bottom line? Is it because capex is subject for depreciation so it is a strategy to park it into somewhere else?

    • Rusmin Ang

      July 31, 2014 at 2:56 pm

      Hi LeeYJ,

      I am really glad to see you actively asking questions!

      With regards to accounting treatment, you are right that lower depreciation leads to higher profit. So when SMRT successfully transfers its assets to the Singapore government, the company will lower its capex and depreciation and improve its bottom-line. But SMRT still needs to lease the infrastructure back from the government which leads to higher operating costs.

      An analogy I can give is like renting a car instead of buying one; your upfront cost is near zero but then you have to pay for the rental expenses when you want to drive the car.

      Having said that, the instant benefit I see is the possibility of increased free cash flow for SMRT (who no longer need to fork out massive amounts of cash to build/maintain the rails) and which could lead to higher dividend payouts to shareholders.

  3. Daniel

    August 14, 2014 at 2:36 pm

    The potential increase in dividend payout is interesting to me. I have 3 questions.
    How do I value this company?
    How do I determine my entry and exit?
    Is there any formula to it?

    • Rusmin Ang

      August 16, 2014 at 10:56 am

      Hi Daniel,

      Valuation can be done using various methods – usually P/E, PEG or DCF. Picking the most appropriate one would depend on your initial assessment of a company.

      We do have a formula for picking and investing in stocks. It’s called the Investment Quadrant. You can read about it here.

      The best time to enter is when a great stock is selling cheap and the best time to exit is probably when it becomes significantly overvalued. Of course, that depends again on your initial analysis and valuation of a stock. We cover more about how do to that and entry/exit strategies as well in our Investment Quadrant course.

  4. Gursharan Singh

    August 16, 2014 at 12:01 pm

    Transparency and Accountability in the corporate sector is perceived as a culture that is announced but rarely practiced. I have been attending AGMs of Bursa Malaysia listed companies for about 12 years and find that Transparency and Accountability statements included in the Annual Reports are just reproductions of listing requirements that are rarely practiced in general. Questions raised normally have vague responses such as the Directors are honest and work in the best interest of the shareholders especially the Minority shareholders or that the information provided is as required by relevant authorities and in compliance with the laws. Companies may have hundreds of Subsidiaries where the total investments are in tens/hundreds of millions of shareholders funds but rarely does the Annual Accounts disclose the financial performance of these subsidiaries. Even some cases Segmental performance may be provided but this is of little benefit to the shareholders.
    Some companies with valuable real estate do not disclose the current market value of the lands/properties but may be at historical costs. This can result in creation of ‘secret’ reserves and indirectly may also understate the market value and thus share price of the company.
    The option of disclosing historical or current value of the land/properties is said to be permissible by the Accounting Standards Profession Organizations. Unfortunately the adverse effect could result in providing substantial shareholders to take companies private at below market prices and also may ‘create’ ‘secret’ reserves which an also provide opportunity for its misuse or fraud by those in power.

    It may be noted that the the Stock Exchanges are also traded and thus it may not be appropriate for them to be the Regulatory Authorities as this could create conflict of interest. But who is to regulate the Regulator. The Government owned sovereign funds are also major players in the stock market and thus there may be conflict of interest for the Government leadership to regulate the Regulators.
    Is this a situation of Co-Operation or Collusion for those in power?

    • The Fifth Person

      August 19, 2014 at 10:03 am

      Hi Gursharan,

      Thank you for a very eye-opening comment!

      It actually wouldn’t come as a surprise that the world of business and many companies engage in subterfuge and operate in this manner. From your statements, it’s easy to see why investors can get lost in the mix when so much information is hidden away or shown in a different light.

      It only makes it that much more important to really suss out the integrity of the directors of a company – which can be no easy feat sometimes!

      But anyway, thanks for dropping by. We would love to hear more of your insights through your future comments any time :)

      • Gursharan Singh

        August 19, 2014 at 12:46 pm

        I sent you some of my articles on which I would appreciate yours/others comments. Copy right not reserved and thus the articles can be freely shared.

        GSK

        • The Fifth Person

          August 19, 2014 at 10:01 pm

          Looking forward to that then! Hasn’t turned up in our inbox yet though :)

  5. Grace

    January 8, 2015 at 5:16 pm

    Hi Rusmin,
    AGM are meant for shareholders who has already invested in the Company.
    How can one attend the AGM without investing in the company 1st?

    • Rusmin Ang

      January 9, 2015 at 2:48 pm

      Gursharan has comprehensively answered your question below! Thanks Gursharan :)

  6. Gursharan Singh C.M.I.I.A. - Malaysia

    January 8, 2015 at 6:43 pm

    You can attend as a shareholder if you have at least one share in the company. Another route as a ‘proxy’ for some one else who is a shareholder. You can also be a ‘proxy’ for organizations/funds where the Board can nominate anyone to attend the meeting of the companies in which it has equity participation.

    As an example I am on the Board of a Co-Operative which has investments in over 100 Malaysian Malaysia listed companies and I, or others including non-members of the co-operative, can be nominated as ‘proxy’ to attend the AGM/EGM of companies.

    Gursharan

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