Imagine a company with a few basic characteristics: It provides a utility-like service for Singapore’s population; it is one of just a few companies that are licensed to operate in its particular industry here; it is a market leader within its industry and it’s a company that has earned reasonable profits for the most part of its corporate life. Given such a description, companies such as SingTel (SGX: Z74) and SMRT Corporation (SGX: S53) would fit the bill (as I’ll point out shortly). Yet despite their outward similarities, the fortunes of the two companies have been so vastly different over the past…
Imagine a company with a few basic characteristics: It provides a utility-like service for Singapore’s population; it is one of just a few companies that are licensed to operate in its particular industry here; it is a market leader within its industry and it’s a company that has earned reasonable profits for the most part of its corporate life.
Yet despite their outward similarities, the fortunes of the two companies have been so vastly different over the past five years as seen in the chart below: SingTel’s shares have gone on to gain some 40-odd percent, while SMRT’s shares have lost almost a third of its value.
Source: Google Finance
SingTel operates in the regulated telecommunications industry here in Singapore together with its competitors, Starhub (SGX: CC3) and M1 (SGX: B2F). Despite the competition, SingTel’s the market leader and continues to earn a good return.
Meanwhile, SMRT operates in the public transportation industry with only one other competitor, the subsidiary of ComfortDelGro Corporation, SBS Transit (SGX: S61). But unlike SingTel, SMRT has seen its earnings sink from S$163 million in 2009 to S$83 million in 2013.
These past few years has seen SMRT facing cost pressures related to fuel and manpower, among others. It is an affliction that still persists today and unfortunately, it has been unable to pass on cost increases to its customers as the pricing of public transportation is more or less fixed by the government. Given the lack of pricing power, SMRT can only try to cut costs in areas where it can, perhaps leading to an increase with reliability issues with its services.
What has changed for SMRT?
Given all the pressure on SMRT, it seems that there might be a silver lining for the company. At the end of last year, the authorities finally agreed to a 3.2% increase in transport fares to help ease cost pressures for the two public transportation companies.
Although the fare increase will likely not be sufficient for SMRT to return to its past profitability, it might mark the beginning of a turning point for the company.
Many problems still exist
Make no mistake though – there are many issues that the company still needs to address. Problems with its service reliability, fuel and manpower costs, government regulations, and a growing debt load are just some of the things that could prevent the company from earning a reasonable return for shareholders.
If the company is able to solve these issues, there might be a brighter future for SMRT. It will be interesting to watch how the company performs in the next few years.
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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 contributor Stanley Lim owns SBS Transit.