SMRT - Keep or Dump?

'People Mountain People Sea!'

Introduction

As taken from SMRT's 2012 Annual Report:

"SMRT Corporation Ltd (SMRT) is a leading multi-modal public transport operator. In Singapore, SMRT offers a comprehensive suite of rail, bus and taxi services that are designed to interconnect seamlessly to make Singapore’s public transport system one of the best in the world.

SMRT has interests in operations and maintenance services, engineering consultancy and project management, as well as the marketing and leasing of commercial and media spaces within our transport network. We have established a strong reputation as a reliable, progressive
organisation, distinguished by our sound corporate governance, commitment to sustainable development and corporate social responsibility.

SMRT was established in 1987 and was listed on the Singapore Exchange in July 2000. As of 31 March 2012, we had a market capitalisation of approximately $2.64 billion. We have an annual turnover of $1,057.2 million and a net profit after tax of $119.9 million."

Key Financial ratios and figures

Purchase Price: $1.84
Current Price: $1.69
Net Asset Value (NAV): $0.521
Net Tangible Asset (NTA): $0.512
Earning Per Share (EPS): $0.079
P/E Ratio: 21.39
Gross Dividend (FY2012): $0.0745
Dividend Yield (Based on Purchase Price): 4.07%
Dividends Paid Out: $113.3mils
Profit After Tax: $119.9mils

Strengths

• Enjoys a duopoly of Singapore rail network with Comfort Delgro
• High barrier of entry for potential competitors
• Upcoming refurbishment of Woodland (2nd Half, 2013), Marina and Bayfront station will increase rental income
• Cash hoard of 195.3mil

Weakness

• Profitability likely to be affected by higher repairs, maintenance, energy, staff and related cost
• Tracks belong to LTA but SMRT have to maintain it as stipulated in separate lease agreement
• Huge maintenance and upgrading cost of $900millions to be spread over 8years ending in 2019
• Repayment of $150mil by October 2014 due to expire of fixed rate notes
• Obligations to purchase the operating assets of the CCL on 4 May 2019
• Dividend payout for FY2012 has fallen to $0.0745 compared to FY2011 $0.085

Opportunities

• Increase in vehicles price forces an increasing percentage of the population to turn to public transportation
• Ridership in public transportation is also expected to grow as Singapore population increases

Threats

• Changing political landscape might dissuade the authority to increase transport fare as the incumbent party will be mindful of the repercussion to their popularity for any fare increase
• Unlikely to have another year of 'Record Profit' anytime soon. The report of such earning at this period of time will probably trigger a public uproar... friends and family around me will be contributing to the angry voices:0 
• Change of focus to the engineering and rail section of the business instead of the lucrative rental and advertising section

Conclusion

I sold all 5 lots of SMRT on 06/05/12 at a price of $1.69, making a loss of $750. However, total dividends collected since purchase date was $850.  Therefore, there was a net gain of $100.

The reasons for the divestment was my increasing lack of confidence in SMRT ability to maintain their dividend payout despite the predicted growth in ridership. I was also not very certain of the degree in increases in SMRT's operation and maintenance cost.

The price at which I entered also seem rather high to me as the Purchase Price is about 3 times more than the NAV. The P/E ratio does gets on my nerve too as it appears rather high to me.

Based on the above reasons, I have decided to divest in SMRT and look elsewhere for higher yielding stocks with a Purchase Price close to their NAV while having a reasonable P/E ratio.