Here’s why analysts think SMRT might be at the losing end of the new rail financing framework

It’s transiting to the new framework this October.

While the new rail financing framework (NRFF) has been pegged by as the key catalyst for SMRT in the near future, given the details announced recently, analysts are saying it may not be such a good deal for the transport company.

According to OCBC, the framework is structured by LTA to allow SMRT to achieve a composite (fare and non-fare) rail EBIT margin of ~5%.

“For better clarity, note that SMRT’s composite rail EBIT margins between FY12 and FY16 ranged from 9.5% to 23.5% under the current rail financing framework (CRFF),” OCBC noted.

Meanwhile, under the NRFF, the annual license charge structure provides a revenue shortfall, sharing and a profit sharing mechanism based on a tiered EBIT cap starting at 5% and EBIT collar at 3.5%.

“This means any EBIT deviations beyond the cap and collar would be shared with LTA, but LTA’s sharing of downside risks will be limited to the license charge payable by SMRT for the financial year,” OCBC added.