Sunday, April 27, 2014

The right time to invest in SMRT?


To become rich from your stock investments, you must do your research first before you invest. The following analysis covers one of the listed companies, SMRT, the largest rail operator in Singapore.

In recent years, every time the Singapore railway system broke down, it was like a nail to the counter's coffin. Due to the service disruptions, SMRT stock price has plummeted at a frightening rate from $1.74 in 2012 to $1.02 in March 2014. Speculators must have lost a lot of money in this counter. This is not surprising because to invest in SMRT, you need to hold a long term investment horizon. Fundamentally, even though SMRT has a monopoly in the public transport system, its business model is heavily dependent on government policies, and because of this, investing in this company is not so often straight-forward.

On 24 April 2014, SMRT share price rocketed 21% on rumors of CEO Desmond Kwek's submission of new financing framework to Singapore government for the company's assets. The increase was the biggest ever one day gain for the stock. I reckon that the CEO had to do something drastic to reverse the destiny of SMRT. In January 2014, the company reported a set of dismal results for the third quarter. The Fare business incurred a loss of $9 million, while its Non-Fare business brought in profit of $27.3 million. If not for the Non-Far business, SMRT would have incurred a loss in the third quarter. SMRT cited increasing operating costs as the key reason for the poor results. So going forward, if SMRT could not get the support from the Public Transport Council on train fare increases, the company need to derive new sources of revenue to sustain growth.

Investors should take note that SMRT has been going on a charm offensive since January 2014. In February 2014, SMRT issued a statement in SGX, explaining the service disruptions and pledging its commitment towards excellence in service reliability. In March 2014, it has signed a MOU with Huawei to jointly develop transport technology products in the international market. On March 2014, Standard & Poors affirmed SMRT's 'AAA' long term corporate rating because of the government's support. In addition, the company had also appointed a new Senior Vice President to improve the Group's operational performance in the trains and rail engineering business. This is in line with the Group's objectives of growing its engineering capability and positioning of SMRT Engineering for local and overseas projects.

The recent spike may create the false impression of a new dawn but in actual fact, the rebuilding project has been initiated since 2013. It is still unknown whether these new initiatives can reverse the fortune of SMRT but only time will tell. My assessment on this company is that the outlook is positive but investors need to be very patient with this counter. I am not vested at the moment but will initiate position once it drops to $1.15.

Magically yours

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