Transport – CIMB

2.5% overall fare reduction from July

New fare structure

Maintain Neutral on sector. The Public Transport Council (PTC) has announced that train and bus fares will be reduced by 2.5% using the fare formula for 2010 and the implementation of distance-based fares. Although transport operators will book lower revenue, commuters will have the flexibility to decide on routes without incurring extra charges. Furthermore, given the rising costs of private car ownership, we believe public transportation ridership will continue to climb yoy, boosted by higher tourist arrivals and a growing population. We maintain Outperform on SMRT with an unchanged DCF-based target price of S$2.41 (WACC 9%). We also maintain Underperform on CD with an unchanged target price of S$1.73, DCF-derived (WACC 10.4%) but with a 10% discount applied to account for its forex risks. Between the two operators, we continue to prefer SMRT for its bigger train operations (including new Circle Line), making it potentially a bigger beneficiary of higher train ridership. Furthermore, more than 20% of SMRT’s operating profit comes from rental revenue, which is likely to jump following additional space coming from new Circle Line stations.

The news

Yesterday, the PTC announced a full reduction of 2.5% for train and bus fares based on the fare formula for 2010 and the implementation of distance-based fares. With the reduction from 3 Jul 10, commuters will only be charged according to the distance travelled regardless of the number of transfers made. Based on the current pattern of public-transport journeys, the PTC said two in three commuters will benefit from the reduction or actually encounter no change in their weekly public-transport expenditure. Some 63% of commuters will save an average of S$25 a year. The remainder will pay S$16 more on average a year.

Comments

Making public transportation more flexible for commuters. This new fare structure does not come as a surprise as it had been outlined in the Land Transport Master Plan. Transfer penalties, which have been reduced gradually over the last two years (15 cts in 2008 and 10 cts in 2009), will be completely gone from 3 Jul. Distancebased fares will afford commuters full flexibility to decide on their preferred route of travel without incurring any fare penalty, if they choose to make transfers.

Positive impact on ridership. Given that the costs of private car ownership have shot up this year, we expect public-transport ridership to climb further yoy. Furthermore, ridership should be boosted by a growing population and higher tourist arrivals.

Train ridership continues to beat expectations. We believe that the fare-reduction impact for transport operations will be offset by higher train ridership, which has surpassed our expectations YTD. SMRT’s March ridership was up 9.1% yoy while ComfortDelgro’s February ridership was up 11.8% yoy.