Transport – CIMB
• Strong outperformance. Since our last sector update in Sep 08, Singapore’s public transportation stocks continue to outperform as investors seek safe havens in the current market turmoil. On average, these stocks have outperformed the FSSTI by 29% and 43% over one and three months respectively. As a unique asset class, both CD and SMRT have operations that should remain quite insulated from weak demand and rising cost of operations. There is also relatively good earnings visibility while the continued decline in energy prices should improve profitability.
• Declining energy prices. Demand for energy has fallen in tandem with a slowing global economy. Crude oil prices are now below US$90/bbl, a 9-month low. While there were concerns earlier in the year about pressures from higher fuel prices for both CD and SMRT, these fears have now been put to rest. Lower fuel prices are positive as both CD and SMRT do not hedge their diesel fuel requirements.
• Ridership growth to boost revenues. Again, we reiterate the success of the Singapore government’s initiatives in inducing motorists to switch to public transport. Recent rises in electronic road pricing (ERP) charges, high fuel prices and a looming recession have all been boosting ridership. Even with the recent 0.7% hike in fares, public transport is still the most economical way to travel in Singapore. Rail ridership growth has been in the double digits for most of the year, despite high base figures.
• Maintain Overweight. We reiterate our Overweight position on the sector on the back of defensive qualities with limited downside risks in the current risk-averse environment. We maintain Outperform with an unchanged DCF (WACC 9.2%, TG 2%) target price of S$2.28 for CD, supported by prospective dividend yields of over 5%. SMRT remains a Neutral with an unchanged DCF target price of S$2.09 (WACC 8.5%, TG 2%) due to the limited upside to our target price.