Land Transport – DMG

Slower ridership growth for operators

Slower ridership growth a dampener for operators. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. We believe slower ridership growth is partially attributable to slower population growth (Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%). We also think population growth could remain soft given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. As operators continue to face cost pressures, we maintain our NEUTRAL call on the sector, with preference for ComfortDelGro (CD) (S$1.72 BUY TP S$1.85) for its cheaper valuations and overseas growth potential over SMRT (S$1.69 NEUTRAL TP S$1.60).

Jan – Oct 12 ridership for rail and bus growing, albeit at a more moderate pace. Ridership for rail and bus continues to grow, due to population growth, as well as high car purchasing costs. However we believe growth is moderating. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. The slower pace in ridership growth coupled with an environment of higher repair and maintenance and staff costs will likely weigh on operators’ margins.

Population growth slowing down. Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%. The Ministry of Transport (MOT) has capped Singapore’s annual vehicle growth rate at 0.5% pa from Feb 13 to Jan 15, and COE (Cat A) prices has spiked 50% YoY to S$78,523 in Dec 12. While we expect more commuters to switch to rail and bus transportation due to the higher car ownership cost, this may not be able to compensate against expected softer population growth given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. We think catalysts for the operators could come from a fare revision formula expected in 1H13.

ComfortDelGro remains our preferred pick due to cheaper valuations and overseas potential. We remain NEUTRAL on Singapore’s land transport sector due to slower ridership outlook stemming from slower population growth as well as cost pressures that could cling in the near term. We favour CD over SMRT due to the former’s cheaper valuation and greater overseas exposure. CD’s overseas operations accounts for 46% of its EBIT. CD’s average overseas EBIT margin of 12.7% is also higher than the 10.4% for its Singapore operations. CD is currently trading at a more attractive 14.5x FY13 P/E vs SMRT’s 19.0x FY13 P/E (FYE Mar).

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