ST : SMRT: A possible proxy property counter

May 4, 2010

COMMENTARY

SMRT: A possible proxy property counter

By Christopher Tan

SEVEN years ago, when Ms Saw Phaik Hwa took the helm at SMRT Corp, more than a few eyebrows were raised.

She was not only the first woman to be appointed to lead the public transport group, but she was also the first person from outside the military and public sector elite to be picked.

Questions were raised: What did someone who carved her career at duty-free retail chain DFS know about running the MRT system?

And how will Ms Saw, known for her love for flashy cars and tinted hairdo, gel with a strait-laced, Temasek-owned entity?

Well, Ms Saw has more than silenced the sceptics - simply by still being around. In fact, she is SMRT's longest serving chief executive after the late Lim Leong Geok.

Less obvious though is how Ms Saw has succeeded in adding a new and thriving facet to a staid and steady business. That facet is rental of retail space in and around MRT stations.

For the financial year ended March 31 this year, rental income contributed $51 million in operating profit, almost 40 per cent of MRT takings.

Before 2003, SMRT's rental income was negligible. So how did she do it?

By old-fashioned doggedness. Ms Saw, according to insiders, managed to convince the authorities to allow the train operator to optimise the utilisation of station space through her persistence.

'She fought, fought and fought until she got it,' one said.

Her endeavour paid off, and more handsomely than even she envisaged.

Back in 2003, she said SMRT had a potential to rent out 250,000 sq ft of retail space in its MRT network, which would have a commuter traffic of one million a day.

By March 31, SMRT had more than 309,000 sq ft of rental space (99.2 per cent occupied), and commuter traffic was more than 1.5 million a day.

Now that SMRT has taken over the Circle Line, its rental income could soar.

Although most of the stations are small, compared with those on the North South and East West Lines, there are still some sizeable ones. The biggest is Esplanade station, which will have 21,400 sq ft of rentable space for some 40 shops.

What Ms Saw has achieved is not miraculous. It is not even rocket science. It stems from her commercial experience in the retail sector, and her persuasiveness with the authorities.

Which begs the question why two other notable divisions at SMRT are not up to scratch: taxis and buses. These businesses joined the fold when SMRT took over Tibs Holdings in December 2001.

Since then, they have either been marginally profitable or simply in the red.

The reasons for the lacklustre bus business may be historical. Tibs, being relatively new to the bus scene, was given smallish route territories to operate in.

It also tried to differentiate itself by acquiring fully built-up buses, a costlier option than buying the chassis and then assembling the body itself.

And being a smaller operator, it does not have the economies of scale of, say, SBS Transit.

As for taxis, why SMRT is faring so poorly remains a mystery.

Perhaps the group should bite the bullet and exit the taxi business rather than having it weigh on the bottom line and capital expenditure year in, year out.

Fortunes in the bus division could turn in SMRT's favour when routes become contestable in the next couple of years - if the operator's service performance is any indication.

Since more stringent bus quality of service standards were introduced in 2007, the smaller operator has been penalised less than its bigger rival. That, however, may or may not be a function of size.

In any case, rental has emerged as the group's largest profit contributor after MRT operations, far outstripping buses, taxis and LRT.

Should SMRT then be viewed as a pure transport play on the stock market? It is a poser worth mulling over.

With such a sizeable rental portfolio, it could even qualify as a proxy to the property sector - like Singapore-listed Jardine Cycle & Carriage is a proxy to the Indonesian market.

Perhaps that explains its $2.15 stock price, which some analysts say is overpriced. Its price-earnings (P/E) ratio of 20 is a tad high compared with ComfortDelGro's 14.5 and SBS Transit's 10.3, they say.

Then again, property counters have been known to have far richer P/Es.

christan@sph.com.sg