SINGAPORE (July 18): Now that the long-awaited new rail financing framework (NRFF) is finally announced on July 15, could this herald a new era of profitability for SMRT Corporation?

Maybank Kim Eng does not think so. Following the NRFF announcement, the brokerage downgraded the embattled rail operator to a sell, with a lowered target price of S$1.36, from S$1.40 previously.

Under the terms of the NRFF, the Land Transport Authority (LTA) is expected to purchase $1 billion worth of assets held by SMRT with effect from October, a move that Maybank Kim Eng’s Derrick Heng notes will relieve the latter of about S$2.8 billion in capital expenditure obligations.

“This will bring significant improvement to its balance sheet,” writes Heng in a note on Monday. “Management will reduce debt with the proceeds, pay off relevant taxes and reinvest to improve its competencies.”

However, SMRT would then be required to pay a licence charge, which comprises fixed and variable components. “While LTA will share part of the revenue and profitability risk in the new regime… it will retain a lion’s share of any margin upside beyond 5%, but take a smaller share of the downside below 3.5%,” he says.

As such, Heng expects the new framework to result in SMRT’s rail business earnings to fall from a five-year average of 16% pretax margins to 5%, and has cut his FY2017 to FY2019 earnings per share forecast by between 19% and 39%.

On top of that, Heng also added that the lack of a special dividend to shareholders “could be a source of disappointment”.

SMRT’s shares were trading at S$1.55 before trading was halted on Friday.