Will LTA share upgrade cost with struggling SMRT?

MayBank says new investments in equipment could crimp SMRT cashflow by 13%.

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.

Out of the recommendations made by the COI, approximately a third of them call for investment in new maintenance or surveillance equipment.

As such, MayBank said it made 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.

It believe though that SMRT’s additional maintenance costs are sufficiently covered by its 13% YoY increase (+SGD10.9 mil) in maintenance cost forecasts for FY3/13.

LTA shares the blame, but what about cost? Here’s from MayBank analyst Bernard Chin:

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.

Another SOS call might be imminent. It remains to be seen how much of the additional investment burden would be borne by the LTA, especially with the latest unusual development of the authorities shouldering part of the blame for events leading up to the Dec 2011 disruptions.

While we do not rule out the possibility of our SGD10 mil provision for additional capex falling short given the extensive need for equipment and infrastructure upgrades, we believe that the LTA would step in with assistance should there be a need for a massive overhaul requiring substantial funding.

The recent SGD900m long-term upgrade plan for the North-South/ East-West Lines announced in April 2012, where the LTA will be sharing part of the cost (no details of the percentage sharing were released) is a good case in point.

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