Fare Hike: SMRT Shareholders Penalised Again
The Public Transport Council uses a fairly vague financial ratio to decide not to grant the Singapore MRT an increase in fares. So we decided to do a comparison of a variety of other ratios to see whether this yardstick stands up to scrutiny. Our conclusion is that ROTA is not only not useful. It is unfair to punish SMRT for being an efficient, profitable company.
The PTC said in granting SBS, but not SMRT, the right to increase fares by up to two cents it used the Return On Tangible Assets (ROTA) as a "reality check". This measures how much money the company makes based on the value of its trains, equipment and other sellable, tangible assets. According to Reuters data, SMRT has a ROTA of 11% while MTR Corp's is 6.7%. In terms of gross profit margin, last financial year MTR Corp's was a hefty 81.1%, but outpaced by SMRT's 89.8%. At best, all this means is that SMRT is better managed, not that it is gouging consumers.
On a cashflow basis – always our preferred yardstick – MTR is actually performing significantly better than SMRT: S$0.37 compared to SMRT's S$0.18. But even so, this depends on the number of shares on issue.
Let's check out some other ratios, based on Reuters data and a HKD-SGD exchange rate of 5.148:
Revenue growth (last financial year)
MTR Corp: 4.24%
SMRT: 4.41%
Revenue per share
MTR Corp: S$0.34
SMRT: S$0.51
Net earnings per share (a fairly useless but commonly-accepted accounting standard, but let's use it anyway for now):
MTR Corp: S$0.27
SMRT: S$0.09
Dividend per share (last financial year)
MTR Corp: S$0.08
SMRT: S$0.07
Book value per share
MTR Corp: S$2.70
SMRT: S$0.42
Total revenue per employee (last financial year)
MTR Corp: S$282,454
SMRT: S$132,938
We could go on and pick probably a dozen other ratios, but what does this list tell us?
In short, pretty much nothing.
The reason is that while SMRT and MTR Corp are both light rail operators in city states, that's just about where the similarity ends. MTR Corp is a S$24.8 bln company, almost ten times the size of the SMRT's market capitalisation of S$2.6 bln.
Further, MTR Corp has many more people to serve than Singapore, based on population size alone.
In my view, the much better yardstick would be to look at the inflation rate, to see how much of an impact the fare increase has on the average consumer. Is the fare increase going to hurt people's hip pockets? That should be the ultimate question, not whether a company is so well run that it is efficient and profitable.
Two cents is pittance, really, but the principle counts. They are robbing Peter to pay Paul, by penalising shareholders to appease commuters. If you take this attitude, it would be better for the SMRT to be less-well run. With a lower ROTA, it would be granted fare increases more readily.
Or take SMRT private and run it as a public service, not as a publicly listed company. Ultimately, publicly listed companies have their shareholders to answer to, not their customers.
Mark Laudi
The PTC said in granting SBS, but not SMRT, the right to increase fares by up to two cents it used the Return On Tangible Assets (ROTA) as a "reality check". This measures how much money the company makes based on the value of its trains, equipment and other sellable, tangible assets. According to Reuters data, SMRT has a ROTA of 11% while MTR Corp's is 6.7%. In terms of gross profit margin, last financial year MTR Corp's was a hefty 81.1%, but outpaced by SMRT's 89.8%. At best, all this means is that SMRT is better managed, not that it is gouging consumers.
On a cashflow basis – always our preferred yardstick – MTR is actually performing significantly better than SMRT: S$0.37 compared to SMRT's S$0.18. But even so, this depends on the number of shares on issue.
Let's check out some other ratios, based on Reuters data and a HKD-SGD exchange rate of 5.148:
Revenue growth (last financial year)
MTR Corp: 4.24%
SMRT: 4.41%
Revenue per share
MTR Corp: S$0.34
SMRT: S$0.51
Net earnings per share (a fairly useless but commonly-accepted accounting standard, but let's use it anyway for now):
MTR Corp: S$0.27
SMRT: S$0.09
Dividend per share (last financial year)
MTR Corp: S$0.08
SMRT: S$0.07
Book value per share
MTR Corp: S$2.70
SMRT: S$0.42
Total revenue per employee (last financial year)
MTR Corp: S$282,454
SMRT: S$132,938
We could go on and pick probably a dozen other ratios, but what does this list tell us?
In short, pretty much nothing.
The reason is that while SMRT and MTR Corp are both light rail operators in city states, that's just about where the similarity ends. MTR Corp is a S$24.8 bln company, almost ten times the size of the SMRT's market capitalisation of S$2.6 bln.
Further, MTR Corp has many more people to serve than Singapore, based on population size alone.
In my view, the much better yardstick would be to look at the inflation rate, to see how much of an impact the fare increase has on the average consumer. Is the fare increase going to hurt people's hip pockets? That should be the ultimate question, not whether a company is so well run that it is efficient and profitable.
Two cents is pittance, really, but the principle counts. They are robbing Peter to pay Paul, by penalising shareholders to appease commuters. If you take this attitude, it would be better for the SMRT to be less-well run. With a lower ROTA, it would be granted fare increases more readily.
Or take SMRT private and run it as a public service, not as a publicly listed company. Ultimately, publicly listed companies have their shareholders to answer to, not their customers.
Mark Laudi
Labels: fare hike, MTR Corp, Public Transport Council, SBS, smrt
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"In my view, the much better yardstick would be to look at the inflation rate..."
I thought they do. As you said, ROTA only provides a "reality check".
"Ultimately, publicly listed companies have their shareholders to answer to, not their customers."
I think publicly listed monopolies have to answer to the government too, especially since SMRT is involved in infrastructure and is expected to generate externalities.
"Or take SMRT private and run it as a public service, not as a publicly listed company."
Private as in government-run? Otherwise you still have profit-seeking shareholders.
My understanding of such matters is that commercial entities have better opportunities to scale up and use resources more efficiently.
In my opinion, whenever you lack free competition, it's difficult to reach an ideal solution.
I thought they do. As you said, ROTA only provides a "reality check".
"Ultimately, publicly listed companies have their shareholders to answer to, not their customers."
I think publicly listed monopolies have to answer to the government too, especially since SMRT is involved in infrastructure and is expected to generate externalities.
"Or take SMRT private and run it as a public service, not as a publicly listed company."
Private as in government-run? Otherwise you still have profit-seeking shareholders.
My understanding of such matters is that commercial entities have better opportunities to scale up and use resources more efficiently.
In my opinion, whenever you lack free competition, it's difficult to reach an ideal solution.
Hi Lim
Exactly - public service as in government run.
I do agree that companies perform better corporatised and privatised.
But publicly-listed companies should not have their prices set for them, to avoid them making a big profit. It's like saying "you can take part in the race, but you're not allowed to win".
Unfortunately, it's not easy to create competition within this area. Can you imagine laying an extra set of tracks for competing rail operators (like the three telcos have had to create separate networks)? Or waiting for the "SMRT train" because it's cheaper than the "Comfort DelGro train"? Just as unfeasible.
All I'm saying is: keep the inflation-yardstick and ditch the ROTA yardstick.
Over to you...
Exactly - public service as in government run.
I do agree that companies perform better corporatised and privatised.
But publicly-listed companies should not have their prices set for them, to avoid them making a big profit. It's like saying "you can take part in the race, but you're not allowed to win".
Unfortunately, it's not easy to create competition within this area. Can you imagine laying an extra set of tracks for competing rail operators (like the three telcos have had to create separate networks)? Or waiting for the "SMRT train" because it's cheaper than the "Comfort DelGro train"? Just as unfeasible.
All I'm saying is: keep the inflation-yardstick and ditch the ROTA yardstick.
Over to you...
Ditching the ROTA yardstick completely is risky. The costs involved with running an MRT can diverge from general measures of inflation. That divergence can be both positive or negative.
Would you still argue for ignoring ROTA if SMRT were running at a loss?
As you've said, it's not easy to create competition within this area. And as I've said, in the absence of free competition, it's difficult to reach an ideal solution.
Would you still argue for ignoring ROTA if SMRT were running at a loss?
As you've said, it's not easy to create competition within this area. And as I've said, in the absence of free competition, it's difficult to reach an ideal solution.
Absolutely!
Even if SMRT was making a loss (let's use positive/negative cashflow as a benchmark instead - "profit" and "loss" are just accountants' opinions) ROTA should not be used to justify a fare increase.
In this case, the company would need to focus on productivity and efficiency gains to make money.
Using a strong ROTA as a benchmark to grant fare increases reminds me of payroll tax in Australia, where companies which were doing well and hired lots of people were subject to a special tax.
Fortunately, they saw the light in Australia.
I hope they see the light here.
Even if SMRT was making a loss (let's use positive/negative cashflow as a benchmark instead - "profit" and "loss" are just accountants' opinions) ROTA should not be used to justify a fare increase.
In this case, the company would need to focus on productivity and efficiency gains to make money.
Using a strong ROTA as a benchmark to grant fare increases reminds me of payroll tax in Australia, where companies which were doing well and hired lots of people were subject to a special tax.
Fortunately, they saw the light in Australia.
I hope they see the light here.
"...if SMRT was making a loss...the company would need to focus on productivity and efficiency gains to make money."
Actually, under a capitalist system, very often such companies go into liquidation.
Much as we would like to, I don't think we can always force efficiency gains. For example, Warren Buffett gave up with airlines.
Actually, under a capitalist system, very often such companies go into liquidation.
Much as we would like to, I don't think we can always force efficiency gains. For example, Warren Buffett gave up with airlines.
...which brings me back to my earlier point: either allow SMRT to run the race without one hand tied behind its back (ROTA), or bring it completely back into the fold of government.
Under the current situation, SMRT is "half-pregnant". As I've said, tying fare increases to inflation is fine, but penalising a publicly-listed comany for being too profitable in my view goes too far.
Under the current situation, SMRT is "half-pregnant". As I've said, tying fare increases to inflation is fine, but penalising a publicly-listed comany for being too profitable in my view goes too far.
I suspect you missed the point here. We are talking about the potential for a regulated company to be forced to suffer losses because it is not allowed to raise prices in the face of rising industry-specific costs while general inflation remains low.
Under such circumstances, why force it back into the government fold when you can just let it raise prices?
As an investor, I personally prefer having the option of investing in a company like SMRT. Its ROTA constraint actually makes the earnings more stable and predictable, a benefit to investors under certain economic conditions.
What would be more important to me as an investor is not so much what constraints the company faces -- as long as they are not obviously unreasonable -- but transparency in the application of regulations.
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Under such circumstances, why force it back into the government fold when you can just let it raise prices?
As an investor, I personally prefer having the option of investing in a company like SMRT. Its ROTA constraint actually makes the earnings more stable and predictable, a benefit to investors under certain economic conditions.
What would be more important to me as an investor is not so much what constraints the company faces -- as long as they are not obviously unreasonable -- but transparency in the application of regulations.
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