Transport – CIMB
Part 1 of 3: Changes to the bus system
• Changes to bus system announced. The Transport Minister, Mr Raymond Lim, announced long-awaited changes to Singapore’s land transport system on 18 Jan 08. Essentially, the key objective is to make public transport more seamless for commuters and to encourage more Singaporeans to choose the bus or MRT over the car. With Singapore’s population expected to surge from 4.68m to 6.5m by 2020, there is a potential 60% increase in demand in daily journeys, from 8.9m to 14.3m. Key strategies are an enhancement of the current hub-and-spoke system to improve connectivity, and the introduction of competition.
• Specific initiatives. The LTA will take on central planning of the entire land transport system. A distance-based fare system would also be introduced. Bus priority measures will be introduced to increase average bus speeds while integrated public transport hubs will continue to be developed and enhanced, supported by an integrated public transport information system.
• Impact of the changes. With increased bus frequencies, running costs are expected to rise for bus operators. In addition, distance-based fares would likely reduce fare income as the transfer fare penalty will be eliminated. Competition will also be introduced as prospective bus operators will have to bid for a package of routes, designed by the LTA.
• What’s next? Rail and car demand management plans are expected to be detailed before the end of Jan 08. For cars, the government may tweak the current 3% annual car population growth rate and raise ERP charges. As for the MRT system, we expect announcements relating to the integration of the new Circle Line and Downtown Line to the existing network as well as a review of the light rail system.
• Neutral on the land transport sector. We maintain our Outperform rating on ComfortDelgro (target price S$2.38, based on DCF valuation, WACC 8.0%), for its global transport footprint, supported by an attractive dividend yield of over 5%. We maintain Underperform on SMRT with an unchanged DCF price target of S$1.82 (7.5% WACC; 2% terminal growth). We see the proposed bus package as potentially challenging for SMRT’s bus operations in the near term.