SMRT CEO: New rail financing should cover fare-revenue risk

SINGAPORE'S new rail financing framework (NRFF) should help operator SMRT Corporation shoulder the risk of fare revenue, says SMRT CEO Desmond Kuek, as market speculation that negotiations will be concluded soon gets stronger.

At the same time, ongoing works to upgrade the North- South and East-West train systems are expected to be completed by 2019, added Mr Kuek.

"One of the things we are looking for in a more sustainable rail financing framework is to manage the risk of fare revenue, because this . . . is entirely borne by SMRT," he said on Friday, adding: "This is obviously a point for discussion in the NRFF."

Mr Kuek was speaking to analysts and the media on SMRT's financial results for the 12 months ended March 31, 2016.

He declined to give more details on the negotiations.

Under the NRFF, Temasek- owned SMRT is expected to emerge as an asset-light company and a pure operator.

The government will own all operating assets and the associated risks for major capital asset investments. These assets will then be leased to SMRT.

So far, SBS Transit's Downtown Line is the only line under this framework. The government introduced the plan in 2010.

Analysts have noted that SMRT had revealed more details about the NRFF in its FY16 financial report that was issued on Thursday.

Deutsche Bank, for example, in a note issued on Thursday, said that SMRT had finally clarified in the report that under the NRFF, "SMRT will become asset light", and that it "will pay a licence charge to LTA for the right to operate these lines".

"There seems to be good progress on the negotiations in transiting to the NRFF," wrote Deutsche Bank. It maintained a "buy" on SMRT's counter, with S$2.42 as the target price.

That Mr Kuek talked about the fare-revenue risk that the train operator shoulders under the NRFF on Friday was another sign of progress in negotiations, said analysts.

The significance of the comment eluded some, however.

"How does it make sense to have the government shoulder all costs of building and maintaining the infrastructure, and let the train operator earn margins at no cost?" said RHB analyst Shekhar Jaiswal, who was at the briefing.

Rail operations are SMRT's biggest revenue source. This was S$681 million in FY16, a 4.1 per cent increase.

Yet it was also the only segment that posted a drop in profit. This was S$7.4 million, a 22.5 per cent fall. Excluding a tax refund, it would have been a loss of S$9.6 million.

SMRT spent S$308 million in FY16 on rail maintenance, a 12.4 per cent increase. This sum is also a quarter of the group's FY16 total operational expenditure, which was S$1.2 billion, a 5.4 per cent increase.

Group total revenue was S$1.4 billion in FY16, a 6.2 per cent increase.

Expenditure on rail maintenance will continue, said Mr Kuek.

SMRT is upgrading its signalling system and third-rail system, while replacing sleepers and boosting power capacity for the North-South and East-West train systems. They will be completed by 2019. By then, the lines will be "virtually new" systems, Mr Kuek said.

The bottom line for rail operations should also improve then. "Once we complete these projects, we will be able to extract some productivity savings, as well as bring repairs and maintenance to a more sustainable level," said the CEO.

SMRT's share price rose 3.38 per cent, or S$0.05, to close at S$1.530 on Friday amid a broader Straits Times Index retreat.

This article was first published on April 30, 2016.
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