Transport – AmFraser
New fare structure mildly positive
• Public Transport Council (PTC) will impose a 2.5% cut on bus and train fares. Effective 3 July 2010, both SMRT Corp (SMRT) and SBS Transit (SBST) – 75%-owned by ComfortDelGro Ltd (CD) – will implement new fares. Fare adjustment is based on formula 0.5CPI + 0.5WI – 1.5% productivity extraction. Change in Consumer Price Index (CPI) was 0.6% in 2009 while change in Wage Index (WI) was -2.6% in 2009.
• Distance-based throughfares implemented at the same time. A commuter incurs separate boarding charges when completing a full journey using both bus and rail modes. To-date, a transfer rebate of 40 cents Singapore (out of 50 cents boarding charge after the first transport mode) has been instituted in an attempt to move towards a distance-based throughfare structure.
• Total removal of transfer penalty incorporated in cut. New fares from 3 July 2010 will be totally distance-based and therefore incorporate total removal of transfer penalty. At the same time, all transfer rebates will also end.
• Last year’s fare adjustment deviated from formula. Amid the economic downturn early last year, SMRT and SBST did not apply for fare hikes (as justified by the formula) for 2009. Instead, they worked with the PTC to pass back cost savings (such as that from Jobs Credit Scheme) to commuters, from 2009 Singapore Budget. As such, the impact on SMRT was a 4.6% and that on SBST was 5.1% cut on average bus and rail fares.
• Previous 3% temporary fare cut imposed since April 2009 will end 2 July 2010. Last year’s fare cut implemented from April 2009, incorporated temporary and permanent components. Temporary component imposed on operators was a 3% cut for 15 months.
• Overall impact of 0.5% net increase mildly positive for bus and rail operators. With the end of the previous 3% temporary cut and the new 2.5% cut, net impact on operators will be a small 0.5% increase in avarage fares.
• No change to our official forecasts now, pending upcoming results. SMRT reports next week on 30 April. We will maintain our official forecasts till then, as impact from new fares will have a marginal full year positive impact of 2% on net earnings.
• Impact on ComfortDelGro (CD) less than SMRT. SMRT has two-thirds earnings exposed to Singapore fare business, while CD has 18%.
• No change to ratings – BUY CD, HOLD SMRT. CD offers 20% share price upside to our fair value of S$1.90/share. SMRT is trading at our fair value of S$2.19/share.