Category: SBSTransit

 

SBSTransit : Q1 Results

Financials

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.

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.

Land Transport – CIMB

Cool winds of change

With changes to the public bus system just announced by the government, both CD and SMRT can expect to eliminate operating losses in this segment of their business and improve their cash flow through lower capex and asset disposals. Conventional thinking favours CD (Add, target S$2.59) as the biggest winner, owing to its larger bus fleet and experience with cost-plus models, but we think that SMRT’s (upgraded to Add, target S$1.67) performance will also improve, as this development could serve as a prelude to a new rail financing framework. We upgrade the sector to Overweight from Underweight, with catalysts from more government initiatives and SMRT as our top pick.

What Happened

The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems).

Implementation only in 2H16. Initially, LTA will tender out three packages of bus services (out of a total of 12), starting with the first package in 2H14, for implementation in 2H16. The three packages will cover 20% of the existing buses. LTA will negotiate with the incumbents to run the remaining nine packages (80% of existing buses) under the contracting scheme, for durations of about five years when their Bus Service Operating Licences (BSOLs) expire on 31 Aug 16. After their expiry, more bus services will gradually be tendered out. The contracts will be valid for 5+2 years.

What We Think

The devil is in the detail. Details of the first bus package will be out next week. After 2022, all packages will be tendered out, with the aim of having at least 3-5 bus operators in the market. While some numbers regarding margins, the transfer of assets to the government and contracting are not out yet, we have made certain assumptions for CD and SMRT, to estimate the impact on their earnings, balance sheets and fleet-disposal plans to reflect these landmark changes.

Earnings upgrade; reduced capex and some disposal cash flows. Both Public Transport Operators (PTOs) should benefit from the transition to a more sustainable model, as this should ward off operating difficulties for them. CD, through SNS Transit, operates about 75% of Singapore’s 4,500 public buses, while SMRT runs the remaining 25%. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14, while SMRT Buses (also 19% of revenue) incurred an operating loss of S$28.4m in FY14. CD’s bus assets on its books are valued at c.S$820m and SMRT’s, at S$250m. While EBIT margins for both may not spike immediately, both certainly have advantages over any new competitor, given their extensive knowhow and track record in running public buses in Singapore.

What You Should Do

Sector upgraded to Overweight. We keep our Add rating for CD with a higher DCF-based target price (WACC 7.1%) after upgrading our earnings. It should be a clear beneficiary of the most significant development in the local bus industry in recent times. We upgrade SMRT to Add from Hold, given its greater earnings sensitivity to this move (see separate notes on CD and SMRT).

Land Transport – CIMB

Cool winds of change

With changes to the public bus system just announced by the government, both CD and SMRT can expect to eliminate operating losses in this segment of their business and improve their cash flow through lower capex and asset disposals. Conventional thinking favours CD (Add, target S$2.59) as the biggest winner, owing to its larger bus fleet and experience with cost-plus models, but we think that SMRT’s (upgraded to Add, target S$1.67) performance will also improve, as this development could serve as a prelude to a new rail financing framework. We upgrade the sector to Overweight from Underweight, with catalysts from more government initiatives and SMRT as our top pick.

What Happened

The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems).

Implementation only in 2H16. Initially, LTA will tender out three packages of bus services (out of a total of 12), starting with the first package in 2H14, for implementation in 2H16. The three packages will cover 20% of the existing buses. LTA will negotiate with the incumbents to run the remaining nine packages (80% of existing buses) under the contracting scheme, for durations of about five years when their Bus Service Operating Licences (BSOLs) expire on 31 Aug 16. After their expiry, more bus services will gradually be tendered out. The contracts will be valid for 5+2 years.

What We Think

The devil is in the detail. Details of the first bus package will be out next week. After 2022, all packages will be tendered out, with the aim of having at least 3-5 bus operators in the market. While some numbers regarding margins, the transfer of assets to the government and contracting are not out yet, we have made certain assumptions for CD and SMRT, to estimate the impact on their earnings, balance sheets and fleet-disposal plans to reflect these landmark changes.

Earnings upgrade; reduced capex and some disposal cash flows. Both Public Transport Operators (PTOs) should benefit from the transition to a more sustainable model, as this should ward off operating difficulties for them. CD, through SNS Transit, operates about 75% of Singapore’s 4,500 public buses, while SMRT runs the remaining 25%. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14, while SMRT Buses (also 19% of revenue) incurred an operating loss of S$28.4m in FY14. CD’s bus assets on its books are valued at c.S$820m and SMRT’s, at S$250m. While EBIT margins for both may not spike immediately, both certainly have advantages over any new competitor, given their extensive knowhow and track record in running public buses in Singapore.

What You Should Do

Sector upgraded to Overweight. We keep our Add rating for CD with a higher DCF-based target price (WACC 7.1%) after upgrading our earnings. It should be a clear beneficiary of the most significant development in the local bus industry in recent times. We upgrade SMRT to Add from Hold, given its greater earnings sensitivity to this move (see separate notes on CD and SMRT).