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SMRT Has Gained 25% In Less Than a Month: What’s Next?

The huge gains recorded by transport outfit SMRT Corporation (SGX: S53) less than a month ago would likely still remain fresh in the memory of market observers.

SMRT was last at S$1.02 per share on 23 April 2014 when it spiked by 19.1% to close at S$1.215 just a day later on 24 April. Since then, shares of SMRT have gone on to put on a few percentage points to log a 25% increase to S$1.27 (as of yesterday) in less than a month.

The jump on 24 April 2014 was in fact, so significant that it prompted queries from stock exchange operator Singapore Exchange, which mentioned that it would be investigating “all possible transgressions” of trading rules. There’s nothing new on that front currently, however.

With such a sharp spike in price in so short a time, investors would likely have an important lingering thought: What’s next?

New proposals

It was revealed by The Straits Times on 27 April (shortly after SMRT’s sharp run-up) that the newswire “understands” that the transport company had submitted proposals on 23 April itself to sell its hard assets to Singapore’s government. The sale would turn SMRT into an asset-light operator which might help relieve the company of some of its high operating costs. This might seem like a legitimate reason for the price-jump.

However, on 2 May 2014, SMRT then clarified that it had submitted the sale proposal to the government a month ago, long before the date of SMRT’s sharp spike in price.

Long-term issues

Regardless of the speculation surrounding the outcome of the government’s decision pertaining to SMRT’s proposal or the real reason for the share price increase, there’s one thing that’s clear: The company still has some major challenges ahead of itself. Based on current figures, it’s clear that the transport outfit is unable to raise its revenue faster than its operating expenses, thus creating a continually-shrinking operating margin.

This brings us to a simple question that investors need to answer for themselves: Would SMRT be able to raise prices or reduce costs (or both) in a sustainable manner to ensure its long-term profitability?

A not-so-perfect business

SMRT is actually quite close to being a “perfect” business. Warren Buffett once mentioned that he prefers to invest in companies that had three main characteristics: 1) The business needs to have an economic moat or competitive advantage; 2) the business is providing a vital need for customers; and 3) the company is in an unregulated market. SMRT is able to fulfill the first two criteria as it’s in an industry (the provision of rail and bus services) with a high barrier to entry and it’s providing a vital service for the public. However, it fails in the last category; SMRT’s market is anything but unregulated and it seems there is still a long way from it ever becoming unregulated.

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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 doesn’t own shares in any companies mentioned.