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Should you take advantage of the SMRT situation and invest now?

So I really get this question a lot on all channels: Given the negative sentiments with the issues faced by SMRT, do you think it is a good time to invest in SMRT?

I think its one stock most people classify as pillow stock because SMRT will always be around.

Rather than do an in-depth analysis I will try to reason it through a few angles.

Business Model

So here is how I see it:

  1. Regulated prices earning more than fuel costs, staff costs and necessary asset purchases
  2. When fuel cost is always a going concern, and asset purchase will have to go up to improve quality of services, total costs will have to rise
  3. Prices may not readily go up due to public sentiments so it means that margins will be squeeze
  4. Retail earns SMRT 70++% margins versus 20+% transport margins. Do you see the additional of circle line improving retail rentals? Does removing a CEO with strong retail background impact the revenue performance?


  • Dividend Yield at 4.9%. Historically this is high for SMRT (See Dividend Stock Tracker)
  • EV/EBITDA 9.6 times
  • Price to Book 3.4 times
  • Price Earnings 16.5
    These valuations will look cheap in US stocks, but in developing markets, its pretty fair. I thought valuation isn’t particularly cheap if you are bargain hunting. Earning back your money in 10 years is pretty standard considering some of the REITs have a EV/EBITDA of 12 times.
    Operation wise, this is a regulated cash flow, and you are not likely to see them operating at deep losses. They can always justify for price increases. However, break even or free cash flow lower than current dividends would mean payouts are smaller.
    Don’t think it will happen? Take a look at SBS Transit. They parallel in a lot of characteristics.

Profitability and Operations

  • Profits have been stagnating after years of good outperformance
  • ROE of 20.5% looks good but have been the lowest in 5 years
  • Net Profit > 161 mil, Free Cash Flow > 183mil, Dividend > 129 mil. The payout ratio currently for the 4.9% yield is around 80%. Not too bad but you have to wonder with increase capital expenditure your profit and free cash flow will go down. The payout will have to increase

Technical Analysis

I would rather use weekly charts now for buy and monitor investors. The cut in 20 week EMA below 50 week EMA took place at the start of 2011 and since then SMRT have been going nowhere.

Just when I see higher lows on the price charts we do see the MACD head close to zero line yet looks to turn down again. We could still be in this range for a while.

Prices have typically moved in a range for SMRT. Lets just say that the news do not have any bearing on SMRT’s prices. It is still at the same place.


I certainly don’t think it looks particularly bargain versus the start of 2011. The price movement of SMRT isn’t a lot.

Has the economic moat narrowed? Perhaps so. Yes of course this business is not going to disappear overnight, but you have to wonder whether it has any moat at all when it cannot expand or maintain its net profit margin and increase its cash flow.

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