Why SMRT share price shoot up/increase 44.6%

SMRT had a huge run-up in its stock price - whopping 44.6% gain in less than 1 month from 23 April where it laid stagnant at S$1.02 for quite some time. This is despite the fact that there are no significant developments in the company!

Nevertheless, many market observers would be lamenting now that they missed such a market darling. Will the up trend continues or will it fade away? Let's take a look at why its stock price soar so high in the first place...

Proposal to sell hard assets to Singapore's govt

After numerous train breakdowns, one of the key concerns is the improving and refurbishing of its railway lines which cost tons lots of money, driving its profits down due to high costs. The potential sale would turn SMRT into an asset-light operator (For more information, you can read the news article here) where: 

• it only charges a cost-plus pricing for operating the lines (a d*mn good deal i would say)
• The high operating costs are now borne by the government, in turn, by the tax-payers. 
• Don't forget about its lucrative rental and advertising side-lines where the opening of Sports Hub will lead to another set of good results.

Over the long run, if the framework is approved, it does help to validate the surge in share price. However, as of 20 May 2014, SMRT is selling at 36.88 times P/E ratio, 2.68 times of the STI multiple. The earnings will have to increase by 100% or 2 times in order for the P/E ratio to be in a more acceptable range of 18+.

Lastly, such a major decision may take some time to materalize and even more time will be required to turn it into profits. People should be careful of buying in a frenzy and getting stuck at the top for a long time in order for fundamentals to catch up to the euphoria.