SMRT to Spend $722 Million to Upgrade Singapore Subway

SMRT Corp. (MRT) fell the most in 21 months on plans to spend S$900 million ($722 million) upgrading Singapore’s subway network after the rail system’s worst breakdown in December.

The city’s biggest subway operator will replace the “aging” signaling system and parts of the track for two rail lines, it said in a statement to the Singapore stock exchange. It will also replace the so-called claws securing the power rail following the December breakdown, as well as continuing its nightly checks of the tracks, it said.

“Although we anticipated SMRT’s higher capex and maintenance burden, the quantum is much larger than expected,” Cheryl Lee, an analyst at UBS AG who rates the stock a sell, said in a report today. “Given these pressures amid intense public scrutiny on service reliability, we believe SMRT can justify a rethink in its dividend policy, which was implemented under its previous CEO.”

SMRT is boosting spending on the 25-year-old rail system amid a government inquiry into the December glitches and as further breakdowns undermined its network’s reliability. Tan Ek Kia, interim chief executive officer and executive director, also apologized in the statement yesterday for recent disruptions, including the ones in the past week.

The stock declined 4.1 percent to S$1.735 at the close in Singapore, the biggest drop since Aug. 2, 2010.

Aging Rail System

“As the system ages, our maintenance regime needs to adapt from one that focuses on repair and overhaul, to one which also includes replacement and renewal,” Tan said in the statement, adding he’s in talks with the government’s Land Transport Authority on sharing the costs of the upgrades.

The December breakdowns, which affected about 200,000 passengers, led the government to review its regulatory and penalty framework. Former Chief Executive Officer Saw Phaik Hwa stepped down on Jan. 6 after the disruptions on Dec. 15 and 17 affected shoppers in the Orchard Road shopping belt in the last weekend before the Christmas holiday.

The maximum fine per breakdown is S$1 million, the government said in January, without saying what SMRT would be required to pay.

To contact the reporters on this story: Khalid Qayum in Singapore at kqayum@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editors responsible for this story: Darren Boey at dboey@bloomberg.net; Colin Keatinge at ckeatinge@bloomberg.net

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