This is the worst-case scenario for SMRT

Costs could skyrocket soon.

According to Maybank Kim Eng, the Ministry of Manpower had strong words for SMRT, stating that the company could have done better to manage concerns of its workers, and not to allow a repeat of such severe breakdowns in labour relations.

Here's more from Maybank Kim Eng:

SMRT‟s CEO Desmond Kuek has also been reported by The Straits Times (1 Dec 2012) to have admitted to "deep-seated issues" within the firm's management, citing managerial, structural, cultural and systemic issues that need addressing.

Such comments from the top executive in SMRT should not just be brushed aside. While we prefer to keep our earnings forecasts intact for now without specifics disclosed, questions will undoubtedly re-surface as to how far these "deep-seated issues" run within the company. More importantly, we would ask: what would it cost to address these issues, and how long it would take before they are rectified.  

Illustration of a worst-case scenario. In our opinion, Mr Kuek's comments could possibly allude to improvements in the main areas of: management, human resource and maintenance.

We attempt to translate this to the main cost components of SMRT, and illustrate how our cost forecasts could potentially be further increased should an aggressive fix of "managerial, structural, cultural and systemic issues" be pursued:

- staff cost: a further 5% p.a. from new management hires, improved staff benefits / human resource initiatives and further engineering staff hires to further enhance service reliability.
- repair and maintenance: increase by a further 10% p.a. to reinforce company focus on transport-related business and enhance service reliability.

The above translates to an 18% reduction to our FY3/14 EPS forecasts, and a corresponding 18% cut to our PER-based Target Price.