Transport Sector – Kim Eng

Land Transport Sector Review Singapore Transport
21 January 2008

Turning Up the Heat

♦ Renewed push to boost public transport usage
The Land Transport Authority’s review of the public transport system – the outcomes were partially revealed last Friday – demonstrated the government’s determination to promote and increase public transport usage in the next 10 to 15 years. Amongst other measures, vehicle growth rate will be reduced and ERP charges increased, while integration between feeder buses, trunk buses and MRT will be enhanced.

♦ Upcoming threats to incumbents
With regards to bus operations, two measures to be introduced: 1) centralised bus planning by LTA by 2009; and 2) gradual introduction of more competition could hurt the bus operations of both ComfortDelgro (CD) and SMRT. Centralised bus operations would likely result in the two operators operating buses along less profitable routes, while the introduction of competition would affect the monopoly status that CD and SMRT currently enjoy in their respective areas of operations.

♦ Comparing bus operations of both operators
SBS Transit, CD’s 75%-owned subsidiary, operates approximately 2800 buses in Singapore and has a 75% share of the scheduled bus market. In comparison, SMRT operates a smaller fleet of approximately 900 buses. Notably, SMRT’s domestic bus operations contributed merely 1.4% to 1H08 operating profit (with an operating profit margin of 1.4%), while CD’s domestic bus operations contributed 13.9% of operating profit (with an operating profit margin of 8.5%).

♦ Premature to downgrade outlook for CD and SMRT
Though we think that the new measures from the Land Transport Review could hurt the bus operations of CD and SMRT, we reckon that it would be premature to downgrade our view of both companies. That’s as increasing public transport ridership could very well offset the above-mentioned negative impact on bus operations. We are thus maintaining our forecasts and target prices on both counters.

CD Price $1.61 Target $1.86
SMRT Price $1.73 Target $1.59

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