SMRT - Purchase of Shenzhen transport company is long-term positive

SMRT’s S$68m purchase of Shenzhen Zona Transport gives the company a foothold in mainland China that should provide significant upside in the long term. However, although the deal is marginally positive, it won’t have any significant impact on medium-term earnings. Meanwhile, passenger numbers continue to grow on SMRT’s domestic rail business, as people choose cheaper travel, resulting in a highly defensible 5% yield. We maintain our Outperform call to a S$2.10 target.

Foothold on the mainland. SMRT (MRT SP - S$1.76 - O-PF) has entered in to asale-and-purchase agreement for the acquisition of a 49% stake in Shenzhen Zona Transport Group for S$68m. The deal should close by September 2009. Zona is currently engaged in taxi and public-bus services, as well as repair and maintenance, car leasing and tour coaches in Shenzhen and Huizhou. We see longer-term potential here through SMRT’s partner in this transaction, National Express Transportation Group, which is a state-linked company with a national franchise. This should provide SMRT with a platform for wider geographic growth in mainland China.

Marginal positive. The purchase price represents 1.7x FY08 PB of Shenzhen Zona and will be funded by all cash. SMRT has S$245m cash on its balance sheet. On completion, management says, the company will be earnings accretive from day one, which is an incremental positive. However. We expect earnings contribution to be less than 5% of the total for FY3/10.

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