SMRT Corporation Has Gained 60% in 3 Months – Is There More Upside to It?

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few months ago, public bus and rail transport operator SMRT Corporation (SGX: S53) could very well have been considered as one of the more disliked shares found in Singapore. From a high of around S$2.30 in July 2010, the company’s shares had fallen to a low of S$1.01 earlier this year in April.

A big reason for the fall in the company’s share price was the fact that it couldn’t raise its fares even though it was facing rising operational expenses like labour and fuel costs.

However, following the announcement of the new contracting model for the public bus services in May this year, SMRT has sprang back to life; the share has rallied by almost 60% from its April low to its current price of S$1.60. With such a strong surge in three months, is there still more upside to SMRT?

Three segments of revenue

SMRT operates in three main business segments: Rail services; bus services; and the highly profitable non-fare segment which includes advertising and rental income. With the introduction of the new contracting model for public bus services by the authorities, only one segment of SMRT’s business had been addressed. Under the new model, the authorities would become owner of all bus service-related assets and infrastructure, hence freeing the need for SMRT to spend huge amounts of capital on maintenance and purchase of such assets.

Although the new business model would likely improve the bottom-line for the company’s bus services segment, there’s another very important related issue here. As the government will take over all bus-related assets and infrastructure (including the buses and depots), would SMRT still be able to receive income from advertising and rental services that take place on its buses and depots? For perspective, here are some figures: As of SMRT’s latest financial year ended 31 March 2014, its bus services segment had chalked up S$28.5 million in pre-tax operating losses while rental and advertising had brought in S$94.2 million in pre-tax operating profit.

.Foolish Summary

Although the changes to the public bus industry that the authorities are implementing would very likely represent good news for SMRT’s bus services segment, investors would still need to seriously consider how the potential loss of income (if any) from its profitable advertising and rental segment might offset the positives happening to its bus services segment.

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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.