Land Transport – DB

Expect 2H ridership to be stronger

January-May ridership growth affected by economic slowdown
YTD, average rail ridership has increased 3.7% YoY to 1.7m, while bus ridership has declined 0.7% YoY to 3.1m. We predicted growth of 6.4% YoY in rail ridership and 4.2% YoY in bus ridership. We are upbeat that ridership figures could be stronger than expected in 2H09 given Deutsche Bank’s forecast of a QoQ recovery in GDP. We maintain our positive view on the sector. We change our preference towards ComfortDelGro (CD) versus SMRT. CD is trading at a 20% discount to the market and offers 37% upside to our target price.

Higher YoY growth in ridership slightly below our forecasts
At SMRT (MRT SP; Buy; target price S$2.05), average daily rail ridership in May 2009 grew 2.5% YoY to 1.39m. On the margin, we are seeing higher YoY growth in May ridership compared to April (+2.3% YoY). Overall ridership numbers for rail and bus were at 2.9% YoY and -0.3% YoY, respectively. These are below our 2009 forecasts for rail and bus to increase by 6.0% and 4.7% YoY, respectively.

January-May ridership slightly below our expectations
ComfortDelGro’s (CD SP; Buy; S$1.75) average daily rail ridership in May 2009 grew 4.7% YoY to 0.35m, while its bus ridership declined 1.2% YoY to 2.26m. The trend continues to deteriorate due to the high base effect. We believe there could be a one quarter lag GDP and expect the turn in 3Q09. Overall rail ridership during January-May grew 6.9% YoY, slightly below our forecast for CD’s rail ridership to grow by 8% YoY in 2009. CD’s overall January-May bus ridership of -0.8% was below our forecast for bus ridership to increase by 4% YoY. We believe that lower oil prices could help buffer the slower ridership growth. Our analysis reveals that every 1% decline in oil could lead to a 0.6% increase in CD’s earnings.

Soft start to Circle Line (CCL) opening in May 2009
Circle Line, which opened towards the end of May 2009, had an average ridership of 30-35k per week. We believe the lower-than-expected ridership was due to the start of the June holidays. We forecast that CCL will operate at a minimal loss in the first year. Cost synergies at CCL could help SMRT reduce operating losses.

We now prefer CD over SMRT; reiterate Buy
We expect CD’s earnings to rebound in 2009, as the company could benefit from resilient ridership and moderating costs due to lower oil prices. The stock is trading back at 2003 levels and offers exceptional value with the risk of earnings falling short. We expect the disparity between the stock’s valuation and the Straits Times Index (STI) to narrow on: 1) upcoming 2Q09 results (our forecasts are 6% above consensus), 2) further appreciation of the GBP and AUD, which could boost its overseas earnings, and 3) higher earnings from its overseas acquisitions.

Beneficiary of lower oil price, wage deflation, higher ridership and new rail
SMRT should benefit from: 1) a drop in oil prices, 2) lower staff costs, 3) resilient ridership growth, and 4) rental income stability due to long leases. We would be buyers on weakness in SMRT. The stock has outperformed the index by 7% in the past month. We will be tracking CCL’s ridership closely to see if the ridership figures can meet our expectations. SMRT is also likely to renew its electricity contract in July/August 2009.

Leave a Reply