Many who live in Singapore are likely to be familiar with the company SMRT Corporation Ltd (SGX: S53).
That’s because the firm runs public bus, taxi, and rail services in the Garden City. In other words, SMRT Corporation is a firmament of Singapore’s public transportation landscape.
The company divides its business into eight different segments, namely, Train operations, Light Rail Transit (LRT) operations, Bus operations, Taxi operations, Rental, Advertising, Engineering Services, and Others. The first two are collectively referred to as the Rail business. The rest are considered Non-Rail businesses.
There is more to learn about the land transport operator. SMRT Corporation’s latest annual report has four important things about its business that investors might want to know:
1. MRT services is the biggest revenue generator
Source: SMRT Corporation’s annual report
SMRT Corporation’s Rail revenue provided 52.5% of total sales for the financial year ended 31 March 2016 (FY2016). For perspective, SMRT Corporation serves around 2 million passenger trips per day in its Rail business.
2. SMRT Corporation operates under long term licensing agreements
Snippets from the annual report below provide insight on the long-term licenses:
“On 1 April 1998, SMRT Trains was granted a fresh licence to operate the NSEWL for a period of 30 years until 2028 (NSEWL Licence) pursuant to a new LOA. In consideration for the licence to operate, SMRT Trains shall pay to LTA an annual licence fee in the amount as prescribed under the Rapid Transit Systems Act (RTSA) or its subsidiary legislation…
…The LTA granted a licence (CCL Licence) to SMRT Trains to operate the CCL for an initial term of 10 years (Initial Licence Term) commencing from 4 May 2009. The CCL Licence may be renewed by LTA, if it deems fit, for a further period of 30 years from the expiry of the Initial Licence Term, subject to any other terms and conditions as LTA may impose.
In consideration for the licence to operate, SMRT Trains shall pay to LTA an annual licence fee in the amount as prescribed under the RTSA or its subsidiary legislation.”
Although SMRT Corporation has been running its business under long-term licenses, such arrangements might change in the future. This brings me to the third point.
3. The New Rail Financing Framework
Investors might be aware that there is a new business model for Singapore’s public bus industry which will be introduced in stages. One of the key differences between the old and new model is that under the latter, the government will assume ownership of all bus services-related infrastructure and assets.
Similar changes might be coming for MRT services. SMRT Corporation is in discussions with the authorities on a new rail financing framework. Management writes in the annual report:
“For better sustainability of the rail transit network, the Group has been in discussion with the authorities on the transition to a new rail financing framework (NRFF) and is making progress.
Under the NRFF, SMRT Trains will become asset light to focus on the operations and maintenance of the MRT and BPLRT [Bukit Panjang LRT] lines, and will pay a Licence Charge to LTA for the right to operate these lines.”
SMRT Corporation’s management team expects the new rail model to be asset light.
4. Rental provides most of the profits
Source: SMRT Corporation’s Annual Report
Although MRT services might be the biggest sales generator for SMRT Corporation, most of the company’s profits actually come from its Rental segment. As the chart above shows, the Rental segment’s EBIT (earnings before interest and taxes) had accounted for over 60% of total EBIT in FY2016.
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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 Chin Hui Leong doesn’t own shares in any companies mentioned.