Transport – CIMB

A safe ride into 2009

• Opportunities amid uncertainties. 2008 was marked by radical changes in the government’s mindset and policies on public land transportation. Its new policies tried to address inadequacies in the current system to meet the country’s broader objectives of accommodating a population target of 6.5m by 2015. Its new task is to encourage more motorists to switch to public transport, while making changes to the land transport system so that passengers’ experience can be enhanced.

• Seamless travel is key. The perception and actual experience of seamless travel on buses and trains is key to encouraging motorists to switch to public transport. To this end, train and bus operators have increased the frequencies of their services and introduced new premium services to areas where there is demand for such services. In 2009, commuters can expect regular service improvements as the government, working together with the transport companies, strives to provide commuters with seamless, comfortable and efficient travel experiences.

• Demand push and pull factors. For investors, public transportation companies offer ridership growth potential, led by various push factors like rising costs of owning and using motor vehicles and rising unemployment while pull factors would include a burgeoning population and improved connectivity and convenience for existing and prospective commuters.

• Rising ridership should continue into 2009. With the addition of 895 train runs per week in 2008 since 4 Feb 08, ridership for the MRT has been very encouraging. In fact, even with the recent 0.7% fare hike in Oct 08, ridership has been growing by double digits yoy. Bus ridership growth has also perked up to a more consistent mid-single digit yoy, in contrast to the declining and erratic growth rates of past years. A steady outlook for ridership should translate into steady core earnings growth for both SMRT and ComfortDelgro.

• Maintain Overweight. The economic downturn, parking fees and ERP charges should continue to push more motorists into taking public transport given its affordability and growing connectivity. The government has also mandated the two key public transportation companies to increase their frequencies and provide greater choice of service routes. Combined, these should drive ridership growth in 2009.

• Outperform on ComfortDelgro. Maintain DCF-based target price of S$1.97 (WACC 11%). This factors in earnings risks from volatile forex. Dividend yield has been consistently 5-6%, providing good support.

• Outperform on SMRT. Maintain DCF-derived target price of S$2.08. We project average EPS growth of 10% for FY09-11 on higher ridership. Our DCF-derived target price of S$2.08 is based on a WACC of 8.5%.

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