Land Transport – OCBC

Performing well as expected

  • Fare hike from Apr-15 onwards
  • Positive on several catalysts
  • Maintain OVERWEIGHT

Review of CY14 results

The two public transport operators (PTOs) in Singapore, ComfortDelGro (CDG) and SMRT Corp (SMRT) had a smooth end to CY14, as results came in within expectations. CDG’s FY14 revenue rose 8.1% while PATMI grew 7.7%. Its PATMI formed 98.5% of our projection as it continued to achieve broad-based revenue growth across bus, rail and taxi segments. Business stability remains as CDG’s key characteristic but we note that there are other growth drivers going forward as well. For SMRT, recovery momentum continues on as 3QFY15 PATMI jumped 58.4% YoY as revenue rose 6.8% on both non-fare and fare businesses recorded broad-based growth. Its operating margins also improved YoY for the fourth consecutive quarters as 9MFY15 PATMI formed 76.5% of our projection. Similarly, we think SMRT has much more room to grow in view of the several catalysts we have identified.

Outlook remains positive on several catalysts

Going forward, we have reasons to believe that the sector outlook remains largely positive on several catalysts. On near-term catalysts, we expect: 1) further growth for CDG’s taxi segment as it is the only taxi operator in Singapore allowed to grow its fleet size by 2.0% in CY15, 2) higher taxi rental income for both PTOs in CY15 as they continue to renew their taxi fleet, 3) full rental income contribution from SMRT’s Kallang Wave Mall from FY16 onwards, and lastly, 4) savings from lower energy costs that will be more visible from FY16 for both PTOs with different hedging exposures. The longer-term catalysts are still the same from our last sector report: 5) with a little more than a year before the new bus government contracting model (GCM) commences, LTA has to take over all the bus assets from the PTOs and we believe both PTOs have much to gain if LTA pays in lump sum to purchase the bus assets, 6) the transition to the new GCM by 2HCY16 will see core bus operations of both PTOs turn profitable, and 7) the announcement of concrete details on new rail financing model, that has limited impact on CDG but large positive impact on SMRT.

Maintain OVERWEIGHT

Overall, the expected increase in ridership in addition to the catalysts stated above will continue to drive growth. We believe PTOs will also continue to manage costs and improve productivity gains, improving profitability further. Hence, we maintain OVERWEIGHT on land transport sector. However, given the recent runup in CDG’s share price, our top pick for the land transport sector is now SMRT as we reiterate BUY on SMRT [FV: S$1.85] while we maintain HOLD [FV: S$3.07] on CDG. However, note that we have also taken into account the potential fines and higher expenses resulting from the series of train disruptions on SMRT services thus far in CY15.

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