SMRT Corporation business as usual

SMRT Corporation - fair value of S$2.04



Business as usual but focus on Ministerial Statement
●Beleaguered SMRT CEO resigns
●No interim impact; business as usual
●Ministerial Statement will be key focus

SMRT CEO resigns immediately. SMRT announced late Friday evening that CEO Saw Phaik Hwa has decided to step down with immediate effect to
“pursue personal interests”. Ms. Saw had been under pressure ever since the series of major service disruptions in Dec last year but had previously rejected calls for her resignation whilst stating her commitment to fix the service issues.

No interim impact; business as usual. As the Board of Directors search for a new CEO – most probably externally – Board member, Mr. Tan Ek Kia, will assume interim executive responsibility for the management of the company. With his previous work experience as Managing Director of Shell Malaysia Exploration and Production and Chairman of Shell North East Asia, we do not foresee any issues arising from this temporary arrangement on operations.

Ministerial Statement to shed more light on SMRT punishment. Transport Minister, Mr. Lui Tuck Yew, will make a Ministerial Statement today on the MRT service disruptions last month. Some of the issues expected to be discussed are on the Committee of Inquiry and its work, reasons for the disruptions as well as if SMRT will be held accountable for the breakdowns.

Initial selling pressure may occur but maintain BUY. While the timing was a surprise, Ms. Saw’s resignation had been somewhat expected and should not affect its share price. Instead, we believe that investor focus will be on the Transport Minister’s Ministerial Statement, which should provide some indication on the penalty to be imposed on SMRT as well as the possibility of any additional costs necessary to plug service gaps. As we maintain our assertion that SMRT’s dividend payout ability remains intact at least for the year (FY12F dividend yield: 4.4%), we leave our DDM-derived fair value of S$2.04 unchanged and maintain our BUY rating on SMRT.

Target price of $1.50

SMRT President and CEO Saw Phaik Hwa has stepped down with effect from last Friday following a recent spate of train breakdowns. Ms Saw was appointed in December 2002 and has been the key driving force behind SMRT over the past nine years.

We were slightly surprised by the timing of her resignation, just weeks after she told the media that she wants to “stay put to make everything right”. We maintain our Sell rating with a target price of $1.50, still based on 15x blended FY Mar12F/13F PER. For investors wanting to have continued exposure in the Singapore’s land transport sector, we prefer ComfortDelgro for its more attractive valuation and geographical diversity.