SMRT dividends endangered by disruption-related upgrades

Government has imposed expensive upgrades on SMRT's rail systems which will likely force the firm to fall short of its dividend payout.

The Land Transport Authority though might share some of the costs as the Committee of Inquiry which put forward the recommendations also partly blamed the government agency on last year's paralyzing service disruptions.

Here's more from Maybank Kim Eng:

The Council has spoken. The Committee of Inquiry (COI) released its report with recommendations to improve the rail network and crisis management, most of which were directed at SMRT. Responsibility was apportioned to the Land Transport Authority (LTA) as well for events leading to the Dec 2011 rail disruptions. A significant question remains of the LTA’s share of the maintenance burden that it will bear. Concerns of CDG suffering collateral damage appear unwarranted, as their involvement remains limited to LTA’s announcements of more stringent regulatory standards.

New investments in equipment could crimp cashflow. Out of the recommendations made by the COI, approximately a third of them call for investment in new maintenance or surveillance equipment. We make a further provision to capex of SGD10 mil for SMRT’s share of new equipment such as third rail assembly improvements, train-specific fault-detection systems, back-up battery replacements, emergency lighting and other staff-equipped detectors. We believe SMRT’s additional maintenance costs are sufficiently covered by our 13% YoY increase (+SGD10.9 mil) in maintenance cost forecasts for FY3/13.

LTA shares the blame, but what about cost? SMRT is likely to continue facing an uphill challenge to comply with all recommendations and yet maintain its dividend payout quantum. We do not rule out LTA bearing some of the structural asset upgrade costs especially since they are now being held partially responsible for events leading to the Dec 2011 disruptions.