SMRT seems like a perfect business, a resilient business against the ups and downs of the financial market. But fundamentally, for now, SMRT not as perfect as what it seems.
Ridership
Ridership is poised to increase, especially with the doubling of the train system by 2020 and also the increasing population in Singapore. SMRT will gain from the increase in riderships with an uptick in their revenue.
The Monster
The monster for SMRT is the regulations. SMRT, after all, like SBS Transit Ltd, is a regulated business.
But what separates this regulation from the rest is that SMRT fare is regulated.
Yikes.
This means what the Company intends to charge its customers, is regulated by the authorities.
In most businesses, when costs increases, they increase their price accordingly to keep their margins intact. For example, when the cost of your fish ball and noodles increase, The aunty at the kopitiam will likewise increase the price of each bowl of fish ball noodles to maintain her profits.
SMRT, cannot do so.
Even with increasing ridership, when costs escalates wildly, the company is unable to raise its price freely to maintain their profits. They live in a predicament where the authorities have to consider pleasing the public vs allowing SMRT to make a reasonable amount of profit.
Fundamentally, this is the biggest no-no for me. It's a deal breaker. I would never consider entering into a long position for SMRT.
What good is a business when it cannot decide how much to charge its customers?
The numbers
We also see that despite rising fare revenues, their EBIT is barely budging. This solidifies the point that the company is unable to proportionately increase its revenue against its rising costs.
The fares have just been hiked
During which, many Singaporeans are lamenting the Government saying things like
"SMRT is earning millions and yet they still increase fare?"
"Why are they allowing the fares to be hiked when there are still so many breakdowns?"
We also note that SMRT has committed to improving its rail services and ramping up its repair and maintenance. It is expected that their expenses on repair and maintenance will rise drastically in the coming quarters (whilst having the same, fixed fares).
Relieve from the Bus segment
Or is it? It depends.
Under the new bus framework, it is expected that the bus segment will become profitable.
Assuming this is true, how much will this contribute to SMRT's bottom line?
Let's not also forget that we are all assuming SMRT manages to win the bus tenders (of which they had lost their recent tender to some UK kid in the block).
Expanding their non-fare business?
Consistel and the 4th telco? OMG! it's gone.
After calls from the public and concerns from various MPs, SMRT decides to focus on its core business.
This means "I'm most likely not going to expand my non-fare business anytime soon, guys!"
Consistel and the 4th telco? OMG! it's gone.
After calls from the public and concerns from various MPs, SMRT decides to focus on its core business.
This means "I'm most likely not going to expand my non-fare business anytime soon, guys!"
My take as an investor
I didn't even need to consider so many factors. The Monster alone is sufficient to make my decision to drop SMRT from my watch list.
I didn't even need to consider so many factors. The Monster alone is sufficient to make my decision to drop SMRT from my watch list.
If Old Chang Kee cannot raise its price of its Curry O without first consulting the Authorities, does this business sound like a good one?
Even if the current price is below its NAV or NCAV or whatever metric out there, there's no certainty that down the road, the regulators could throw another curve ball and change the business model of SMRT once again.
By then, who's to know what SMRT will become?
I'm not sure, and I don't think I'm willing to take this risk. Will you?
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