Should SMRT investors snap up Temasek’s $1.68/share buy out offer?

Near term earnings are expected to be weak.

Analysts are urging SMRT investors to let go of their shares by approving the scheme arrangement, as a low EBIT scenario for SMRT remains a stark possibility.

According to a report by OCBC, the New Rail Financing Framework (NRFF) will see SMRT sacrifice EBIT margin upside for higher free cash flow positions throughout the 15 year licence period. Expenses are also expected to stack up and chip away at earnings over the next few years, with rail reliability still undergoing improvements and upgrading.

“This means that earnings will remain weak and core rail operations may even be in loss positions in the near to medium term. With rail network renewal only set to complete in 2018, SMRT’s share price may continue to face downward pressure on weak earnings outlook,” OCBC asserts.

“Furthermore, even with high free cash flow, we believe most of the cash will be invested into improving SMRT’s maintenance capabilities rather than paying out higher dividends,” it adds.

In addition, with Temasek’s buyout on the table, SMRT’s share price is anticipated to spike up today.

Meanwhile, RHB advises unhappy investors to make themselves heard. Approval of the offer requires over 50% of the shareholders present and voting at the meeting to receive a sanction from the court and an in-principle approval from the Singapore Exchange. As this is not a general offer, investors who abstain from voting will have no say in the final outcome of the voting process.

Further, there remains a risk that the proposed acquisition falls through with numerous conditions to be satisfied in order for the scheme to be effective. As such, OCBC urges equity holders to also consider selling part of their holdings in the open market at $1.68.