Is the New Rail Financing Framework a double-edged sword for SMRT?

SMRT’s profits might suffer amidst a relief from $2.8b capex woes.

It would seem like the New Rail Financing Framework (NRFF) is the only silver lining in SMRT’s bleak business outlook, but the scheme is without its flaws. DBS analyst Andy Sim said while the NRFF is expected to relieve SMRT of its future $2.8 billion capex woes, it would cap the company's future earnings.

The framework, announced in 2008, would ease SMRT of its capital expenditures by transferring the ownership of the rail operating assets to Land Transportation Authority (LTA), giving the government agency the power to decide when to build up, upgrade, and replace assets to better meet public expectations.

"With the risk-sharing mechanism, SMRT Trains is required to share profits through a tiered structure (of up to 95%) should EBIT margins exceed 5%. Meanwhile, LTA will share 50% of the shortfall if EBIT margins fall below 3.5%. This provides less volatility to SMRT’s future earnings, but it will also limit the upside potential," Sim said.

SMRT recently endured a plummeting net profit due to a glaring $9.4 million operations loss in rail business.

The public transport operator also reported an escalated operating expenses of $311.5 million due to staffing and maintenance cost.

"..with the transition to the New Rail Financing Framework, margins for its rail segment would be capped and we project that profits of SMRT will be more subdued," the analyst said