Transportation – DB
Fare hikes slightly less than expected
Effective fare hike expected to be small; Comfort the stock to own
The net effective fare hike granted was slightly less than our expectation of 1%, but given the defensive characteristics of both SMRT and Comfort we maintain Buy. Comfort in particular offers good value, and if oil prices continue to decline, this could offer upside to our earnings estimates. Ridership growth for both trains and buses remains strong.
Fare hike offered, strategy is clearly to drive up public transport ridership
The Public Transport Council (PTC) has granted an overall net fare adjustment of 0.7% for 2008. This was slightly less than the 1% we expected. The headline percentage fare hikes are more (5.5% in some cases) but the net benefit for Comfort’s bus and train operations is expected to be 0.9% and for SMRT’s operations 0.6%. The difference in headline increase and the effective increase is because the transfer rebate to passengers was increased from 25 cents to 40 cents.
Transfer penalty will be fully removed in 2009
Under the Land Transport Masterplan, distance-based through fares will be introduced in 2009 to make transfers more seamless in the hub-and-spoke public transport system. So in 2009, when the fare hike requests are again reviewed, the net effective fare hikes are likely to be smaller than the headline numbers would indicate.
SMRT has contracted electricity prices; diesel prices unhedged for both
SMRT has contracted its electricity prices through to March 2009. While this should ensure stability in the cost structure, we note that the new contract was about 30% over the earlier one. Both ComfortDelGro and SMRT have no hedges in place for diesel, but indicate that they are reviewing this closely.
Comfort TP S$1.97; SMRT TP S$1.95
For ComfortDelGro our TP of S$1.97 is based on a dividend discount methodology, assuming an explicit three-year growth forecast of 5% and a 3% terminal growth rate. The assumed payout ratio is 80% and cost of equity derived is ~8%. Given that the company continues to make acquisitions and grow overseas, our forecast of 5% growth over the next three years should be easily achievable. We transition growth over three years to a terminal growth rate of 3%. Dividend payout assumption during the stable growth phase is 85%. The downside risks are higher fuel costs, for which the company currently has no hedges, and execution missteps for acquisitions overseas.
Our target price for SMRT of S$1.95 is based on a ROE/PB-growth methodology (ROE/COE), assuming a c.8% discount rate, 6% three-year explicit forecast growth rate and 3% terminal growth rate, and ROE of c.21%. The ROE of 21% is benchmarked against current run rates. This is based on SMRT’s current ROE run rate and an assumption that the company is mostly in a terminal growth rate mode. On the downside, risks include lower-than-expected ridership, softness in the rental business for some stations when lease renewals become due, higher fuel costs, and competition in the taxi business.