Author: tfwee
Transport Sector – Kim Eng
21 January 2008
Turning Up the Heat
♦ Renewed push to boost public transport usage
The Land Transport Authority’s review of the public transport system – the outcomes were partially revealed last Friday – demonstrated the government’s determination to promote and increase public transport usage in the next 10 to 15 years. Amongst other measures, vehicle growth rate will be reduced and ERP charges increased, while integration between feeder buses, trunk buses and MRT will be enhanced.
♦ Upcoming threats to incumbents
With regards to bus operations, two measures to be introduced: 1) centralised bus planning by LTA by 2009; and 2) gradual introduction of more competition could hurt the bus operations of both ComfortDelgro (CD) and SMRT. Centralised bus operations would likely result in the two operators operating buses along less profitable routes, while the introduction of competition would affect the monopoly status that CD and SMRT currently enjoy in their respective areas of operations.
♦ Comparing bus operations of both operators
SBS Transit, CD’s 75%-owned subsidiary, operates approximately 2800 buses in Singapore and has a 75% share of the scheduled bus market. In comparison, SMRT operates a smaller fleet of approximately 900 buses. Notably, SMRT’s domestic bus operations contributed merely 1.4% to 1H08 operating profit (with an operating profit margin of 1.4%), while CD’s domestic bus operations contributed 13.9% of operating profit (with an operating profit margin of 8.5%).
♦ Premature to downgrade outlook for CD and SMRT
Though we think that the new measures from the Land Transport Review could hurt the bus operations of CD and SMRT, we reckon that it would be premature to downgrade our view of both companies. That’s as increasing public transport ridership could very well offset the above-mentioned negative impact on bus operations. We are thus maintaining our forecasts and target prices on both counters.
CD Price $1.61 Target $1.86
SMRT Price $1.73 Target $1.59
Transport – CIMB
Part 1 of 3: Changes to the bus system
• Changes to bus system announced. The Transport Minister, Mr Raymond Lim, announced long-awaited changes to Singapore’s land transport system on 18 Jan 08. Essentially, the key objective is to make public transport more seamless for commuters and to encourage more Singaporeans to choose the bus or MRT over the car. With Singapore’s population expected to surge from 4.68m to 6.5m by 2020, there is a potential 60% increase in demand in daily journeys, from 8.9m to 14.3m. Key strategies are an enhancement of the current hub-and-spoke system to improve connectivity, and the introduction of competition.
• Specific initiatives. The LTA will take on central planning of the entire land transport system. A distance-based fare system would also be introduced. Bus priority measures will be introduced to increase average bus speeds while integrated public transport hubs will continue to be developed and enhanced, supported by an integrated public transport information system.
• Impact of the changes. With increased bus frequencies, running costs are expected to rise for bus operators. In addition, distance-based fares would likely reduce fare income as the transfer fare penalty will be eliminated. Competition will also be introduced as prospective bus operators will have to bid for a package of routes, designed by the LTA.
• What’s next? Rail and car demand management plans are expected to be detailed before the end of Jan 08. For cars, the government may tweak the current 3% annual car population growth rate and raise ERP charges. As for the MRT system, we expect announcements relating to the integration of the new Circle Line and Downtown Line to the existing network as well as a review of the light rail system.
• Neutral on the land transport sector. We maintain our Outperform rating on ComfortDelgro (target price S$2.38, based on DCF valuation, WACC 8.0%), for its global transport footprint, supported by an attractive dividend yield of over 5%. We maintain Underperform on SMRT with an unchanged DCF price target of S$1.82 (7.5% WACC; 2% terminal growth). We see the proposed bus package as potentially challenging for SMRT’s bus operations in the near term.
Transport – BT
Transport Central – on its way to wean you off cars
LTA will play central planner; more operators in bus industry to raise efficiency
In moves that will nudge car owners to hop onto public transport for a quick and comfortable ride, the government has unveiled plans to integrate bus and rail services and to open up the basic bus service industry to more operators.
The changes were announced yesterday by Transport Minister Raymond Lim and are part of a land transport review which seeks to make public transport the preferred mode of travel.
Among the initiatives being rolled out:
The Land Transport Authority (LTA) will take a centralised bus planning role from end-2009.
There will be more bus lanes and an extension of the full-day bus lane scheme.
On the road, buses will have priority over other vehicles when exiting bus bays and at major junctions.
After 2009, the bus service industry will be gradually opened up and routes tendered out.
A review of the rail network, cars and the road system was also undertaken and the respective details will be announced over the next couple of weeks.
Yesterday, Mr Lim said that the land transport review sought to answer the key question: What will it take for the majority of Singaporeans to choose the bus or MRT over the car? With the current 8.9 million daily journeys today set to jump to 14.3 million by 2020, making public transport the centrepiece of Singapore’s land transport system is crucial.
‘We will invest in quality, not just system capacity,’ he said. ‘We need to ask: Can people get to a train station or bus stop quickly and comfortably?’
More competition – but of a different kind – is seen as a key element in this strategy.
By next year, buses may not just be adorned with the familiar SBS Transit or SMRT colours. Competition will be introduced to raise efficiency and service levels. There are about 3,700 public buses today, of which 2,900 are SBST‘s. Mr Lim said that economies of scale are limited for bus operators with a fleet size above 500 buses.
‘Our intention is to introduce competition ‘for’ the market, where operators compete periodically for the right to provide a package of bus services designed by the LTA,’ he explained. ‘This is different from competition ‘in’ the market or head-on competition for market share, which would be detrimental to an integrated public transport system where the emphasis is on cooperation to grow the overall pie.’
The LTA could not say how many new operators are expected to enter the field but currently, there are only a handful of private bus operators with a fleet of 50 buses or more. Ironically, the market leader is ComfortDelGro Bus, a subsidiary of ComfortDelGro Corp, the parent company of SBST, with more than 300 buses.
But as with other private bus operators such as Woodlands Transport and Yeap Transport, its mainly school and tour buses are not suited for basic bus services.
‘These private companies will have to invest in new buses if they want to tender for the routes,’ said one bus company executive. ‘But they have also been known to cooperate among themselves as joint ventures, so we will have to see.’
To solve the problems of waiting time, travel time and overcrowding, the government wants to make the hub-and-spoke system seamless. This model, using buses to ferry commuters to a hub from which they will continue their journey on another bus, is more efficient than a direct bus service.
‘We need to improve the connectivity of our hub-and-spoke system, in particular, the integration between the feeders, trunk buses and MRT,’ said Mr Lim. ‘Only then can we ensure seamless transfers and make the whole public transport journey as convenient as possible.’
Currently, the two public transport operators – SBST and SMRT Buses – plan bus routes based on commercial considerations with minimum service obligations. As part of the new people-centric approach, LTA will become the central planner. By 2015, the target is for 80 per cent of public transport commuters to complete their journeys within an hour – up from 71 per cent today. And by 2020, the gap between public transport and car journey times will be reduced, with the former not taking more than 1.5 times the latter – down from the current 1.7 times.
To shorten waiting time for buses and reduce crowding, at least 80 per cent of bus services must be run at peak frequencies of 10 minutes or less by August 2009, compared with 15 minutes today.
TELCOs – BT
StarHub seen gaining with portability
STARHUB has emerged as the top pick among Singapore telcos, as the telecom sector prepares for the new regime whereby customers will be able to switch mobile-phone operators while keeping their established phone number, says Cazenove & Co.
The research house is also bullish on MobileOne (M1), but recommended an ‘underperform’ on SingTel.
At a briefing yesterday, analyst Lai Voon San said he expects the new system, called mobile number portability (MNP), to dominate the telecom sector here, with many average consumers switching to StarHub given the bundled discount they can get from the latter’s strength in pay-TV.
‘We think that StarHub can grab an extra 10-15 per cent market share on top of what they already have now,’ he said. Customers will be offered incentives to have the same supplier for their mobile, pay-TV services and broadband telecommunications.
Mr Lai believes that SingTel is likely to be the biggest loser as it has the most post-paid subscribers at present. MNP is expected to be introduced here in May.
Mr Lai is similarly bearish on SingTel’s pay-TV service, saying: ‘No matter how much money they throw into it, it will be years before they make a return.’ He sees SingTel’s project as only driving up the price of content for consumers.
He said M1 stands out for its forecast dividend yield of 9.7 per cent this year – the highest in Cazenove’s telco universe. The firm’s earnings are relatively stable, Mr Lai said.
Looking ahead, he said that the next generation national broadband network (NGNBN) should gain further momentum through the year ‘as decisions are expected over who will build the network’.
While this could hurt incumbents SingTel and StarHub, the latter’s pay TV dominance will support its competitive outlook with SingTel again the most vulnerable.
‘We expect bundling to gain momentum as SingTel tries to compete against StarHub and offer more discounts,’ he added.
Cazenove sees the telecom sector in Asia-Pacific as a safe haven amidst the market volatility this year, and is expected to outperform the other sectors.
The major themes across the region include growth in wireless subscriber, regulatory changes and regional expansion of assets.
China is expected to add 110 million wireless subscribers, while Indonesia will see another 31 million new ones.
Mr Lai sees policy implementations and changes ahead for 2008, including additional licences in places like Thailand and Indonesia, MNP in Singapore and Malaysia, and 3G rollouts in China and Thailand.
In addition, Cazenove expects more company mergers and acquisitions (M&A) as telcos expand their areas of operation. Telekom Malaysia’s de-merger of its regional assets is likely to bring in a strategic partner which will further highlight M&A activity. Others like SingTel remain active buyers.
Cazenove has set fair values of $3.50 and $3.35 on StarHub and SingTel respectively.