Saturday, November 23, 2013

SMRT - Too Big to Fail. Too Big to Prosper?

SMRT is integral to the lives of many Singaporeans. Without the public train and bus services, Singapore will literally cease to function. As a result, the public's general perception is that SMRT is a company that service the masses (low-middle income families). It is simply too big to fail. It even has Temasek Holdings as its major shareholder. At first glance, SMRT should be a solid blue-chip with strong fundamentals. Unfortunately, in my opinion, that is far from the truth.

I can imagine the following scenario playing out in an informal coffeeshop or hawker centre chit chat session.

Teochew porridge uncle, "Hi DW! Here for some porridge again?"

DW, "Yup. I am a Teochew after all. Please give me extra pork liver in my porridge. Thanks uncle!"

After 5 minutes......

Teochew porridge uncle, "Here you go. Enjoy! By the way, I just read from the papers that SMRT is not making huge profits. In fact, their profits are dropping fast. Made me really happy!"

DW, "Why did that make you happy?"

Teochew porridge uncle, "Because SMRT's aim should NOT be about making profits! They should focus on providing quality service to the commuters. In the past, during Mdm Saw Phaik Hwa's era, SMRT reported handsome profits and cash flow. Transport fares kept rising too. It really made my blood boil! Greedy management!"

DW, "Ok. OK. Calm down uncle. But other government-linked companies such as Singtel, Starhub and DBS are equally, if not more important to the survival of Singapore. Does your blood boil when you see Singtel, Starhub and DBS making profits and rewarding their shareholders too? "

Teochew porridge uncle, "Actually, I am ok with the telcos and banks making profits and prospering."

DW, "Ok........errrrrrmm. No disrespect, but dun you think you are being biased here?"

Teochew porridge uncle, "Dun get me wrong. I am not saying I want SMRT to go bust and collapse. I just want SMRT to function efficiently without making huge profits."

DW, "So, you are saying that SMRT should just earn enough to maintain its fleet of trains and buses, pay the staff, pay the electricity/fuel bills and distribute a little dividends?"

Teochew porridge uncle, "Yes. And they should not even distribute any dividends! No fat bonuses for the management too!"

DW, "Ok......Well, thanks for the porridge. Hey, is that your iPad?"

Teochew porridge uncle, "Yes. My wife and I used it to watch our favourite Taiwanese, Hong Kong and Korean drama serials when there is no customers around. My son helped me set everything up. All I need to do is to press a few buttons. Without the teletext service now, old people like myself have to learn how to surf the net too. My grandchildren have iPads too. I can do video chats with them. I could not believe I exceeded the data usage limit recently, I think I have to upgrade my basic data plan."

DW, "Wow! Even your grandchildren have iPads. You dun mind paying more for a higher-tiered data plan? Why dun you cut down on your drama serials? Can save money."

Teochew porridge uncle, "I dun mind paying more. My wife and I love our drama serials. ^^"

DW, "Alright then. See you again uncle. Bye!"

SMRT is too big and important to be allowed to prosper without incurring the wrath of the public. In fact, the title of the recently-released report from the Fare Review Committee says it all. "Affordable Fares. Sustainable Public Transport". I can't help but notice the succinct use of the word "Sustainable". That word is as commonly-used as "Productivity" nowadays. So, for those readers who have been asking me whether they should invest in SMRT. My question to you will be "Do you want to invest in a company that is merely sustainable?"

Is Sustainable Good Enough?
Dividend Warrior


Anonymous said...

Balancing the need to cater to the transport needs of the public and the interest of its shareholders is probably one of the greatest challenges for a listed public transport company in Singapore.

In any case, I personally think that what applies to SMRT in your blog post also applies to the other listed public transport in Singapore, i.e. SBS Transit.

My 15HWW said...

Hi DW,

I am also of the view that public transport providers should not be making huge profits (which is almost definitely at the expense of lower fares). After all, all the tracks and transport infrastructure are built using taxpayers' money.

What exacerbates SMRT's problems is that service standards have been dropping (larger population and older infrastructure) and it's bearing the brunt of the citizens' angst these days.

Profits unlikely to be high for the rest of this decade.

komatineni said...

Problem is SMRT or SBS are seen as basic necessities where as SingTel, DBS are more of 'wants'. So people doesnt want to pay more for 'needs' and expect 'government' or some one else to bear the cost but give them 'cheap' stuff. On the other hand they dont mind spending huge money on 'wants'.
Sounds weird but that's human behavior.

Anonymous said...

There are lots of ways for smrt to grow without increasing the fares. Smrt should grow together with the singapore economy. Although I think if operational cost of maintaining the train goes higher they should pass it down to the public. Otherwise its bound to go under. Encouraging the public to own smrt shares I think is a good thing so they could care more for the future of the co.

Unknown said...

Hi Dividend Warrior, if I have spare cash now and would like to buy some dividend stocks, which are the ones are better to go for?


Kindly advice and much appreciated! =)

Jerry said...

Hi DW,

I have followed your blog and also posts in LYN forum.

Just to ask, how do I start investing in REITS? Open CDP account at SGX? Is it still recommended to enter REITS now? I am Malaysian working in Singapore with valid work pass.

OCBC introduced BCIP.. is it similar to what you are having now?

Dividend Tech Warrior said...

Hi Anonymous,

Yes, I agree. It is a delicate balancing act. It is also true that SBS transit is facing similar problems.

Dividend Tech Warrior said...

Hi 15HWW,

Yup, profits will remain stagnant for quite some time.
However, periodic fare raises will keep the company in business. The next increase is coming next year.

Dividend Tech Warrior said...

Hi komatineni,

Whenever I commute between my home and workplace in the public bus and train, so many people are staring at their smartphones and tablets. Telecom is definitely a necessity nowadays. Almost everyone has a mobile phone.

A lot of people own private cars and motorbikes. So, public transport is not a necessity for them. Unfortunately, the taxes they paid is used to build the rail infrastructure.

Dividend Tech Warrior said...

Hi Edmund Wong, depends on the amount of your spare cash. If the amount is small, you should focus on 1 or 2 stocks.
I shall assume you have a modest amount of $10k.

I would recommend ST engineering and SATS.

Unknown said...

Thanks! What if I had more and what other counters are worth getting?

Dogs of STI? Care to name a few?

Thanks and regards,

Dividend Tech Warrior said...

Hi Jerry,

Thanks for following my blog. ^^

It has been a long while since I visited LYN forum.

Since you are a Malaysian working in Singapore, I would suggest you apply for a trading and CDP account with a Malaysian bank such as Maybank or CIMB. They have branch offices here in Singapore. Just visit them and fill in some forms.

REITs are listed and traded like stocks on the stock market. There are malaysian REITs on the Kuala Lumpur stock exchange too.

QE tapering will start next year, so I will not advise to invest all your money in REITs now.

I did not apply for the OCBC investment programme.

Kyith said...

if a business is highly favorable, the price is likely to be not cheap.

often the value bargains are those that folks cannot easily discern value from permanent impairment.

to merely dismiss smrt as an unsustainable business illustrates a failure to explore out of the box value that competitors around the world can leverage upon.

most of the value proposition that are cheap will likely be in a situation like SMRT. it is whether a person actually looks into quantifiable figures or just using first level thinking as some form of reasoning

Paul said...

Oh wow! This is by far one of your best blog post ever. Insightful, relevant and full of wits.

This prove my view that you can write properly if you put effort to it.

I wish you put more effort to your posts at VB.


Dividend Tech Warrior said...

Hi Edmund Wong,

Besides ST Engineering and SATS, you may want to consider Sembcorp or Singtel when their prices dip. ^^


Dividend Tech Warrior said...

Yo Kyith/Drizzt/Windboi,

Dun get me wrong. SMRT is definitely sustainable. The Singapore government will make sure of that. The public trains & buses will keep running.

However, I doubt SMRT will be allowed to prosper and earn huge profits from the commuters. This is certainly bad news for shareholders.

Lastly, I prefer to keep things simple. Not everything in life requires in-depth, detailed thinking. Sometimes, first level thinking can work fine too. :)

The SMRT management may be able to turn the company around, who know?


Dividend Tech Warrior said...

Hi Paul,

Thanks for the compliment. ^^

Kyith said...

if you only look at less detailed level, are you advocating buying a blue chip at any price?

Dividend Tech Warrior said...

Yo Kyith/ Drizzt/ Windboi,

I am afraid you missed the whole point behind my article.