Would Peter Lynch Buy SMRT?

smrt logoMost of us think of Peter Lynch as a growth-investing specialist. That is not wrong.

But Peter Lynch is not averse to recovery plays too. And SMRT (SGX: S53), which has seen its market value slump from S$3b to $1.6b in four years, might be a potential turnaround. But what would Peter Lynch think?

The last time SMRT shares were worth S$1 a pop was back in 2006. The decline of SMRT shares is not exactly news-breaking. Profits at the operator of Singapore’s Mass Rapid Transport (MRT) system have slumped from $162m in 2009 to just S$83m last year.

The numbers for the most recent 12 months are even more disconcerting. With Net Income of just $32m, the S$1.6b multi-modal transport company is valued at 48 times historic earnings.

SMRT’s fall has not been due to a lack of demand for its transport services. If anything, the exact opposite appears to be the case. Since 2009, revenues have increased by over a quarter, which would imply a compound growth rate of 6%.

However, gross margins have dropped from 50% to 36% over the last four years. That would suggest its rail fares are not exactly keeping up with cost increases, which is worrying. But the recently-approved fare increases should help to go some way to address the problem.

Recently, SMRT pointed to continuing efforts to drive higher productivity. There is room for improvement. Currently, its Asset Turnover, which measures the amount of sales generated for every dollar of asset employed in the business, is 0.6. By comparison, ComfortDelGro (SGX: C52) boasts an Asset Turnover of almost 0.8 and SBS Tr5ansit (SGX: S61) generates a whopping $0.90 for every $1 of asset employed. Admittedly we are not comparing like with like, but it provides a pointer to what could be achieved.

Another financial ratio that might interest Peter Lynch is net cash or in this case, net debt. SMRT has debts of S$628m and cash of S$128m, which leaves it with a net debt of S$500. I can almost see the frown of disapproval on Peter Lynch’s face.

SMRT has a lot of work ahead of it. But until it can charge passengers a realistic fare for using its services, I suspect even Peter Lynch might wait patiently on the platform for the next available train to come along.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.