SMRT restructuring will continue whatever the outcome of Temasek's offer

SINGAPORE - Whatever the outcome of state-investor Temasek Holdings' offer to take mainboard-listed SMRT Corporation private, the transport operator will still carry out restructuring plans that it has already laid out, its chief Desmond Kuek said on Thursday.

But a clear upside from privatisation would be that it gives SMRT more room to push ahead with plans, he said, adding that he had "no details" on how exactly Temasek will help.

In a media interview on Thursday, Mr Kuek elaborated on what SMRT's future plans are, as shareholders are expected to vote soon on Temasek's plan to take SMRT private.

On Sept 29, shareholders will vote at an extraordinary general meeting on whether they agree to Belford Investments, Temasek's wholly-owned subsidiary, acquiring the outstanding SMRT shares that Temasek does not already own. It is offering S$1.68 for each of these remaining 702 million or so shares.

When asked how will SMRT's business plans change should it remain public or become private, Mr Kuek said: "My business direction, as has been explained at the last annual general meeting, remains as is."

He added: "We continue to restructure to suit the needs of the company and to drive our operational performance and our growth ideas."

This is because the ownership structure "doesn't change the substance of how we do things", said Mr Kuek. Temasek has already said that they support the business direction that SMRT will take, he added.

Part of this vision would entail SMRT remaining as a multi-modal group, said Mr Kuek. It currently has businesses in the rail, bus, taxi and private-hire sectors.

SMRT will also work on strengthening working relationships between its operational (such as rail services) and commercial (such as rental) teams.

A third aspect involves sharpening its engineering capabilities. Overseas projects can help it bring back new practices and technologies from these "larger exposures" to the transport network here, said Mr Kuek.

These three areas are crucial as they build on the group's core capabilities, he said.

But Mr Kuek also left the door open to any potential changes that may come after privatisation.

When asked if SMRT would consider splitting its rail business from the rest of its operations after delisting, Mr Kuek said: "Whether or not things would change, if there's a superior logic and synergy, I don't see why not."

Temasek's bid comes just after the government agreed to move SMRT's train and light rail businesses to a new rail financing framework (NRFF). Shareholders will also vote on this proposal on Sept 29, before they decide on Temasek's bid.

If the NRFF proposal is approved, SMRT can sell operating assets of its rail business for about S$991 million before taxes. This saves it from having to deal with depreciation costs and capital expenditure.

But risks still remain for SMRT even under the NRFF, said Mr Kuek.

For one, there are more stringent regulatory requirements. With maintenance costs still borne by SMRT, it has committed to adding at least 700 to its maintenance headcount.

In addition, SMRT still has no control over fares or ridership. In the latest fare review, government officials said train fares could drop by as much as 5.7 per cent later this year.

When asked on Thursday how Temasek's bid can help SMRT mitigate these risks and also speed up its restructuring, Mr Kuek was emphatic: "I don't have the details on that. . . I don't have anything more to add to what Temasek has said about that."

However, there is one other clear advantage of delisting SMRT. Temasek said that this can free SMRT from the pressures of being a listed company. Mr Kuek agreed: "It would provide an environment to allow SMRT to retool and reinforce its core skillsets."

A third advantage would be for shareholders to avoid future uncertainties expected under the NRFF by cashing in their holdings now.

Analysts have come out in recent days to unanimously call for shareholders to accept Temasek's offer, as SMRT earnings are expected to weaken in the future, hurting shareholders.

Mr Kuek himself said on Thursday that the NRFF, which can shave off its earnings margin to close to 5 per cent, will impact dividend payouts "by a similar magnitude".

But some have noted that there is still a risk of Temasek's bid failing come Sept 29.

For the vote to pass, at least half of those present must vote in favour. Their holding must also equal to at least 75 per cent of those present.

"Hence, we think it makes sense for investors, who would like to mitigate this risk, to sell part of their holdings in the open market at a price closer to S$1.68 before the Scheme Meeting," wrote OCBC analyst Eugene Chua in a note on Thursday.

SMRT's counter closed flat on Thursday at S$1.655. It closed on July 21 at S$1.645, the first trading day after the NRFF and Temasek's bid were announced.

"My business direction, as has been explained at the last annual general meeting, remains as is. We continue to restructure to suit the needs of the company and to drive our operational performance and our growth ideas." Mr Kuek


This article was first published on September 16, 2016.
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