Land Transport – DMG

New MRT line extension on East-West Line

Tuas West Extension (TWE) to add 7.5km to East-West Line (EWL). Transport Minister Raymond Lim announced that the EWL will be extended from Joo Koon station to Tuas West area. The TWE is expected to be fully operational by 2016 with ~100k daily commuters. Coupled with costs related to new train purchase (13 new trains will be acquired), constructions of a new train depot and a new road viaduct, the entire TWE is estimated to cost ~S$3.5b. While the addition of TWE is already known beforehand, its track length and operational date differ from previous indication of 14km and 2015 respectively. Despite the shorter length of TWE and delay in operational date, we maintain our belief that the Singapore rail ridership is on course for a multi-year growth trend as population size increases. Maintain OVERWEIGHT on land transport sector.

Circle Line Stage 4-5 to be operational in 4Q11. In addition to TWE addition announcement, the Transport Minister also confirmed our belief that CCL Stage 4-5 will only be operational in 2H11 (exact announced period is 4Q11) while the CCL Marina Bay extension will be ready in 2012. In order to achieve breakeven for CCL Stage 1-5 and the CCL Marina Bay extension, we estimate the daily ridership has to be in excess of 481k. While both TWE and CCL track additions will undoubtedly lead to increase in ridership for SMRT, we think that SMRT's earnings could be pressured in the short to medium term due to advance hiring associated with the CCL 4-5 beginning 2HFY11. Hence, we are maintaining NEUTRAL on SMRT with TP of S$2.08.

Prefer ComfortDelGro (CD) within the sector. We continue to favour CD over SMRT due to the former's 1) greater overseas growth potential, and 2) cheaper valuation. In addition to margin improvements from ridership increase, we think CD will be looking at acquisition of more land transport companies in foreign markets in order to achieve overseas growth. This is evidenced from CD's recent bidding for operational rights of metropolitan buses in Adelaide. The bidding involve six contracts to run 850 government-supplied buses in Adelaide for eight years. Should CD succeed in the bidding, it will have its first city bus service in Australia. The result of the bidding will be out in Mar 2011 and operations are slated to commence in Oct 2011. We think CD remains undervalued, possibly due to excessive concern regarding CD's forex exposure in relation to its extensive overseas operations in UK & Ireland (9M10: 13% CD's EBIT), Australia (9M10: 16% CD's EBIT), and China (9M10: 12% CD's EBIT). However, given the approximately even contributions from the emerging (China) and developed nations (UK, Ireland, Australia), we reckon the chances of adverse forex movement from sustained strengthening of S$ against the local currencies of CD's overseas operations as low. Maintain BUY on CD with TP of S$1.85. Currently, CD is trading at 14x FY11F PATMI vs SMRT's 18x FY11F PATMI.

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