Singapore

IN a widely anticipated move, Temasek Holdings has proposed a S$1.2 billion buyout of SMRT Corp to steer the transport operator away from the pressures of staying listed while it faces business pains and transits a just-unveiled new rail model.

The takeover offer by Temasek's wholly-owned Belford Investments, received by SMRT on July 16, a day after details of the new rail financing framework (NRFF) were unveiled, is pegged at S$1.68 cash per share. This values SMRT at some S$2.57 billion and is an 8.7 per cent premium over its last-traded price of S$1.545 last Friday; it is also a 10.7 per cent premium over its three-month volume-weighted average price (VWAP) prior to the last trading day. Trading in the counter resumes on Thursday.

In a joint statement, Temasek and SMRT backed up the privatisation move as one that will provide SMRT with greater flexibility to focus on its primary role - to deliver safe and high quality rail service - without the short-term pressures of being listed even as it makes the transition under the new regulatory framework.

SMRT chairman Koh Yong Guan said: "The NRFF is an improvement on the current framework. However, the company will continue to face significant risks. We do not have any control over fare increases and ridership growth - two key revenue drivers for SMRT Trains."

The firm, which has been beset by many disruptions and breakdowns, is also faced with cost risks, given its ageing and expanded network, which would require more investments for better rail services.

Chia Song Hwee, Temasek International president, said: "We are proposing to move SMRT to private ownership so we can more closely collaborate on system-level transformation."

He added that the privatisation bid would enable minority shareholders to monetise their holdings in SMRT to avoid the uncertainties of the transition under the NRFF, which will kick in on Oct 1.

SMRT will sell its rail assets to the Land Transport Authority for S$991 million under the NRFF. Based on the new charge structure that builds in a revenue-shortfall sharing and a profit-sharing mechanism, SMRT's EBIT margin will be capped at an average of 5 per cent.

Temasek's takeover bid has been structured as a scheme of arrangement, rather than the more-common approach of a general offer; lawyers deem the former a more straightforward route, as it already owns 54 per cent of SMRT.

Temasek senior managing director Juliet Teo, asked at a media briefing late on Wednesday why the firm went for this option, replied: "The objective is not to increase the stake, but to privatise. From that perspective, the scheme allows us to remove the uncertainty to shareholders. It's an all-or-nothing (deal).

"Does it allow us to revise that offer? No. If we fail this round, technically speaking, we have to wait a year out. But we might not have the same view to privatise a year out. So, the opportunity is now."

Credit Suisse is advising Temasek on the deal, while Bank of America Merrill Lynch is advising SMRT; it is understood that SMRT's legal adviser is Wong Partnership.

Based on Merrill Lynch's advice and subject to the advice of an independent financial adviser, SMRT directors view the scheme favourably and support the acquisition.

But not everyone is pleased.

Mano Sabnani, a veteran investor who owns 20,000 SMRT shares, said: "The offer is relatively low."

Exciting times could be ahead with the sale of the rail assets, which would free up SMRT's cash and pare its debt, hence "some of us are prepared to wait out this transition phase", he added.

When asked whether Temasek would bite had it been offered the exact deal (at S$1.68 apiece) for its SMRT block, Mr Chia replied: "Yes. We consider that a fair price and will be prepared to sell our stake. If the offeror has the same objective (as us) to ensure the long-term sustainability of the rail system, then yes, we would be prepared to sell at that price."

Analysts have painted a less sanguine picture of SMRT's prospects since details of the NRFF were unveiled, saying that it does little to dial up the firm's profitability.

Most have also zeroed in on the 5 per cent cap on operating margins - lower than past trends - for its rail operations (inclusive of rental and advertising under trains) in the new charge structure.

There are other concerns. "Without any operating assets, SMRT loses the bargaining power it previously held with ownership. This makes it even easier for it to be replaced by another operator," said Phillip Capital.

Indeed, significant business risks, challenges in the regulatory environment and the profit cap under the new charge structure were factors flagged to provide context for Temasek's privatisation bid for SMRT.

A market observer quipped: "Are things really that gloomy for SMRT? And if they are, does that mean Temasek, a savvy investor, is doing national service by taking SMRT private?"

- Additional reporting by Soon Weilun

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[TOKYO] Annual core inflation in April hit a four-year low and stayed below the central bank’s 2 per cent target for a third straight month, as fuel and education subsidies offset rising raw material costs from the Middle East conflict.

Analysts expect consumer inflation to re-accelerate in the coming months as surging oil prices and higher import prices from a weak yen keep the Bank of Japan (BOJ) under pressure to raise interest rates.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 1.5 per cent in April from a year earlier, slowing from a 1.7 per cent gain in March and marking the slowest year-on-year growth since March 2022. It compared with a median market forecast for a 1.8 per cent rise.

The slowdown in Tokyo core CPI, seen as a leading indicator of nationwide price trends, was due largely to the effect of subsidies to curb utility bills and tuition.

Energy costs fell 4.6 per cent year-on-year in April after a 7.5 per cent drop in March. Prices of food, excluding volatile fresh items like vegetables, rose 4.6 per cent following a 4.9 per cent increase in March.

An index stripping away the effect of fresh food and fuel, which is closely watched by the BOJ as a better gauge of trend inflation, rose 1.9 per cent in April after a 2.3 per cent gain in March.

“Core consumer inflation is likely to accelerate due to cost-push factors from the Middle East conflict, which will push up not just prices for energy but various items,” said Masato Koike, senior economist at Sompo Institute Plus.

“Policy measures may moderate the price pressures to some extent but not all of the impact from the Iran war, so real wages could fall back to negative territory.”

The BOJ kept interest rates steady on Tuesday, but dropped strong signals about the chance of a hike as soon as June on mounting inflationary pressures.

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After exiting a decade-long massive stimulus programme in 2024, the BOJ raised rates several times, including in December, when it took its short-term policy rate to 0.75 per cent on the view Japan was on the cusp of durably hitting the central bank’s 2 per cent inflation target.

But the slow pace of rate hikes has been blamed for keeping the yen weak and boosting import costs, which in turn piles inflationary pressure on the economy.

Underscoring policymakers’ concern over rising living costs, Japan conducted its first yen-buying intervention in nearly two years on Thursday, sources have told Reuters, sending the Japanese currency higher by as much as 3 per cent.

The US-Israeli war with Iran has complicated the BOJ’s rate decision by adding inflationary pressure through rising fuel costs, weighing on an economy heavily reliant on oil imports from the region.

Japanese manufacturers saw input cost inflation surge to a three-and-a-half-year high and supply chains deteriorating at the steepest rate in 15 years in April, a private survey showed on Friday, a sign the conflict was starting to take a toll on corporate activity. REUTERS

[TOKYO] Japan’s manufacturing activity grew at its strongest pace in over four years in April, as companies ramped up production and stockpiled goods amid supply chain disruptions caused by the Middle East war, a private-sector survey showed on Friday.

The final S&P Global Japan Manufacturing Purchasing Managers’ Index (PMI) rose to 55.1 in April from 51.6 in March, marking the biggest expansion since January 2022. A reading above 50.0 indicates expansion, while below that level signals contraction.

Manufacturing output surged at the fastest rate since February 2014, up sharply from March, driven by higher new orders and efforts to build inventories due to uncertainty over the war in the Middle East.

New orders rose at the quickest pace since January 2022, compared with a slower rate in March. Companies said concerns over future supply chain delays and price increases due to the Middle East conflict prompted customers to place new orders, with some also noting greater demand for AI-related technology.

However, supply chains deteriorated at the steepest rate in 15 years, with delivery times lengthening to the greatest extent since April 2011 during the aftermath of the Tohoku earthquake. This was a sharp worsening from March.

Input cost inflation surged to a three-and-a-half-year high, up from March, as companies reported higher prices for raw materials, oil and transport. Output prices rose at the fastest rate since November 2022, compared with a slower pace the previous month.

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BOJ keeps rates steady but hawkish split points to June hike

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Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said: “This suggests the current boost to manufacturing could soon fade unless we see reduced market uncertainty and more stable supply chain conditions, particularly if market demand weakens and stock-building activities start to reverse.”

Business confidence regarding the year-ahead outlook slipped to its second-lowest level since June 2020, down from March, as uncertainty around the Middle East war and its impact on global economic conditions dampened forecasts. REUTERS