Land Transport – Phillip
Results commentary. Operating losses of S$5mn for SBST’s bus business, sequential decline in average fares & operating losses at its bus business in China resulted in the lower than expected earnings for CDG. While SMRT’s profits declined significantly in the quarter, the margin pressure felt was inline with our expectations.
Capacity Expansion. Singapore’s Transport Minister updated on plans for the public transport system during the Ministry’s Committee of Supply (COS) debate (See: Transportation Sector Update, dated 8 March 2012). Initiatives to ease congestion and improve service quality for the public transport sector imply that more capacity would be injected into the Bus & Rail network over the next few years. For the Bus network, the government would setup a S$1.1bn Bus Service Enhancement Fund to fund the purchase of 550 buses. The Public Transport Operators (PTOs) would fund another 250 buses, representing total fleet growth of 800 buses (c.20% of current fleet) over the next 5 years. Congestion on the Rail network would also be eased with a 40-70% increase in train fleet across various parts of the network.
No Fare adjustment in 2012. There would be no fare adjustments in 2012. Singapore’s public transport fares are reviewed annually with the maximum allowable fare increase set by a predetermined formula (0.5*ΔCPI+0.5*ΔWI-1.5%). With capacity expansion and rising operating costs, we believe that keeping transport fares unchanged would result in margin compression for the PTOs.
We prefer CDG to SMRT. With Singapore’s fare based business accounting for more than half of the Group’s profits and 77% its sales, SMRT has a significant exposure to the new measures implemented. CDG would be less affected due to the diversity of its global operations. For CDG, exposure to Singapore’s fare based business is much less material at only a fifth of its sales and 3% of profits. When comparing valuations on a Forward P/E basis, CDG’s stock price is much more attractive at 13X as compared to SMRT’s 20X. We maintain our Buy recommendation on CDG and Sell on SMRT.