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SMRT Breakdowns Dent Earnings as Rail Fines Loom: Southeast Asia

SMRT Breakdowns Dent Earnings as Rail Fines Loom
An SMRT Corp. train departs from Expo station past construction work below in Singapore. Photographer: Munshi Ahmed/Bloomberg

Singapore’s SMRT Corp., named the world’s best metro operator in 2009, angered commuters, lost its CEO and became Asia’s worst-performing major rail stock when trains stopped running on time. Worse may be in store.

The December breakdowns, the most disruptive in its 25-year history, prompted protests and forced the company to boost spending on upgrades amid the government’s biggest transport-related inquiry since 2004. The regulator said last week it’s considering raising the maximum penalty it can impose on train operators from S$1 million ($786,000).

“There are still a lot of uncertainties and I don’t think it’s over yet,” said Lee Wen Ching, an analyst at CIMB Group Holdings Bhd. in Singapore who rates the stock underperform. “The ongoing inquiry could result in further macro headwinds.”

Known for its efficiency in carrying more passengers per kilometer than subway operators in Hong Kong, Tokyo and New York, SMRT attracted 50 percent more customers in the past five years as population growth accelerated and two new casino resorts led to a surge in tourists. A government push for people to use public transport over private cars has exacerbated the outcry from commuters accustomed to reliability in Singapore.

SMRT declined 0.3 percent to a three-year low of S$1.61 in Singapore trading. The drop took the stock’s six-month slump to 11 percent, more than any Asian passenger rail company on the 104-member Bloomberg World Transportation Index. Costs from the breakdowns reduced profit in the last quarter to the lowest in more than eight years.

One Buy Rating

Eleven of the 17 analysts who track the company have sell ratings, and only one analyst recommends buying the stock, according to data compiled by Bloomberg. For Hong Kong’s MTR Corp., nine of 14 analysts have buy recommendations.

Former CEO Saw Phaik Hwa quit on Jan. 6 following the disruptions that led to a Dec. 17 rally with 80 people near the city’s downtown demanding her departure. SMRT said at the time she resigned to “pursue personal interests.” Saw, who earned S$1.85 million in the year ended March 2010, was previously regional president of luxury retailer DFS Venture Singapore Pte.

The Land Transport Authority said in a May 18 statement it will “enhance the penalty framework to adequately reflect the impact on commuters,” adding that it’s “reviewing the maximum penalty that can be imposed on the operators.”

The inquiry, which started last month, is the biggest for the city’s transportation industry since the 2004 collapse of a downtown highway. The investigation on SMRT may lead to mandates for more stringent repairs, maintenance and checks, which would increase costs and hurt earnings, CIMB’s Lee said.

‘Cost of Success’

SMRT declined to comment because the regulatory review is being carried out, according to an e-mailed response to questions.

“Singapore has had very rapid population growth in the past decade, driven by inflows of foreign workers and foreign professionals, and there’s been a quantum leap in tourist arrivals over the last five years with the advent of the integrated resorts,” said Prasenjit Basu, head of research and economics at Maybank Kim Eng Holdings Ltd. in Singapore. “That has put some strain on the public transport infrastructure, but I would call this the cost of success.”

That cost now amounts to S$900 million, which SMRT will spend over eight years to carry out major upgrades on its subway network, including its aging signaling system. The two major disruptions in December over a 36-hour period left more than 200,000 commuters stranded along the rail line for the Orchard Road shopping belt, with some trapped in the tunnel.

Diverse Experience

SMRT named Tan Ek Kia, former chairman for Northeast Asia at Royal Dutch Shell Plc, to replace Saw as the interim head because of his “diverse experience in engineering and construction, safety, operations and business management.”

About 2.7 million passenger trips are made on Singapore’s subway every day, the city-state’s Transport Minister Lui Tuck Yew said April 9 in Parliament.

“They are running thousands of train trips for more than 18 hours a day and I daresay that there is no way you can prevent disruptions from occurring,” Lui said. “What you try to do is minimize the major disruptions.”

Several breakdowns on SMRT’s newer network have occurred since December, including the Circle Line, which opened in stages starting 2009. SBS Transit Ltd., a unit of Singapore’s biggest owner of taxis, which started the North East Line nine years ago, also reported disruptions on its network this year.

‘Always Crowded’

“The number of breakdowns has reached the point of being unacceptable and maintenance needs to be improved,” said Kue Chan Chong, 46, a Singaporean commuter who takes the East West Line at least twice a day. “Regardless of the time you take the train, it’s always crowded.”

SMRT carried more than 70 passengers per kilometer of train operations, according to the Land Transport Authority. That’s more than 60 for Tokyo, and far exceeds those for cities including Hong Kong and Chicago, it said.

SMRT is asking the transport authority to share the costs of its upgrades, which will include the wooden rail ties and locking claws, by 2019. SMRT awarded a S$195 million contract to replace the signaling system to a unit of Thales SA in February.

“In addition to repair and maintenance, a significant part of our system needs to be replaced or renewed,” Interim CEO Tan said April 30. “We’ve come to a conclusion that our maintenance approach needs to be adapted to take better account for the aging of the system and increased train runs to meet higher ridership demand.”

Public Transport Push

Singapore is encouraging more people to use public transportation. The city plans to double its rail network to 278 kilometers (173 miles) in 2020 from 138 kilometers in 2010, which includes building new lines and extending existing ones, according to the transport authority.

The city has cut taxes to spur investment, prompting companies to hire hundreds of thousands from overseas, with foreigners and permanent residents making up more than a third of the 5.2 million population. The two casino resorts, which also include a downtown convention center and Universal Studios theme park, boosted visitors to a record 13.2 million in 2011.

The number of passengers increased 34 percent to 10.6 million in the quarter ended March, up from 7.9 million in the previous three months, according to SMRT.

“I don’t think it has altered Singapore’s image in any way, because Singapore’s infrastructure is still spectacular by world standards,” Basu said.

Singapore was ranked by Mercer in November as the Asian city with the best quality of life, citing values such as “continuously investing in infrastructure and public services.”

Plunging Profit

Higher expenses caused SMRT’s net income in the quarter ended in March to fall 59 percent to S$13.9 million, the smallest since the three months ended June 2003, according to data compiled by Bloomberg. It spent S$3 million for the disruptions in December.

The increase in costs for the company comes on top of spending on new trains and buses, as well as higher fuel costs, according to Somesh Agarwal, a Singapore-based analyst at Macquarie Group Ltd.

“With capex increasing many folds with operating costs, cash flow is fast drying up and earnings growth will be hard to come by,” Agarwal said.

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