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
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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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