2.5% overall fare reduction from July

New fare structure

Maintain Neutral on sector. The Public Transport Council (PTC) has announced that train and bus fares will be reduced by 2.5% using the fare formula for 2010 and the implementation of distance-based fares. Although transport operators will book lower revenue, commuters will have the flexibility to decide on routes without incurring extra charges. Furthermore, given the rising costs of private car ownership, we believe public transportation ridership will continue to climb yoy, boosted by higher tourist arrivals and a growing population. We maintain Outperform on SMRT with an unchanged DCF-based target price of S$2.41 (WACC 9%). We also maintain Underperform on CD with an unchanged target price of S$1.73, DCF-derived (WACC 10.4%) but with a 10% discount applied to account for its forex risks. Between the two operators, we continue to prefer SMRT for its bigger train operations (including new Circle Line), making it potentially a bigger beneficiary of higher train ridership. Furthermore, more than 20% of SMRT’s operating profit comes from rental revenue, which is likely to jump following additional space coming from new Circle Line stations.

The news

Yesterday, the PTC announced a full reduction of 2.5% for train and bus fares based on the fare formula for 2010 and the implementation of distance-based fares. With the reduction from 3 Jul 10, commuters will only be charged according to the distance travelled regardless of the number of transfers made. Based on the current pattern of public-transport journeys, the PTC said two in three commuters will benefit from the reduction or actually encounter no change in their weekly public-transport expenditure. Some 63% of commuters will save an average of S$25 a year. The remainder will pay S$16 more on average a year.

Comments

Making public transportation more flexible for commuters. This new fare structure does not come as a surprise as it had been outlined in the Land Transport Master Plan. Transfer penalties, which have been reduced gradually over the last two years (15 cts in 2008 and 10 cts in 2009), will be completely gone from 3 Jul. Distancebased fares will afford commuters full flexibility to decide on their preferred route of travel without incurring any fare penalty, if they choose to make transfers.

Positive impact on ridership. Given that the costs of private car ownership have shot up this year, we expect public-transport ridership to climb further yoy. Furthermore, ridership should be boosted by a growing population and higher tourist arrivals.

Train ridership continues to beat expectations. We believe that the fare-reduction impact for transport operations will be offset by higher train ridership, which has surpassed our expectations YTD. SMRT’s March ridership was up 9.1% yoy while ComfortDelgro’s February ridership was up 11.8% yoy.

New fare structure mildly positive

• Public Transport Council (PTC) will impose a 2.5% cut on bus and train fares. Effective 3 July 2010, both SMRT Corp (SMRT) and SBS Transit (SBST) – 75%-owned by ComfortDelGro Ltd (CD) – will implement new fares. Fare adjustment is based on formula 0.5CPI + 0.5WI – 1.5% productivity extraction. Change in Consumer Price Index (CPI) was 0.6% in 2009 while change in Wage Index (WI) was -2.6% in 2009.

• Distance-based throughfares implemented at the same time. A commuter incurs separate boarding charges when completing a full journey using both bus and rail modes. To-date, a transfer rebate of 40 cents Singapore (out of 50 cents boarding charge after the first transport mode) has been instituted in an attempt to move towards a distance-based throughfare structure.

• Total removal of transfer penalty incorporated in cut. New fares from 3 July 2010 will be totally distance-based and therefore incorporate total removal of transfer penalty. At the same time, all transfer rebates will also end.

• Last year’s fare adjustment deviated from formula. Amid the economic downturn early last year, SMRT and SBST did not apply for fare hikes (as justified by the formula) for 2009. Instead, they worked with the PTC to pass back cost savings (such as that from Jobs Credit Scheme) to commuters, from 2009 Singapore Budget. As such, the impact on SMRT was a 4.6% and that on SBST was 5.1% cut on average bus and rail fares.

• Previous 3% temporary fare cut imposed since April 2009 will end 2 July 2010. Last year’s fare cut implemented from April 2009, incorporated temporary and permanent components. Temporary component imposed on operators was a 3% cut for 15 months.

• Overall impact of 0.5% net increase mildly positive for bus and rail operators. With the end of the previous 3% temporary cut and the new 2.5% cut, net impact on operators will be a small 0.5% increase in avarage fares.

• No change to our official forecasts now, pending upcoming results. SMRT reports next week on 30 April. We will maintain our official forecasts till then, as impact from new fares will have a marginal full year positive impact of 2% on net earnings.

• Impact on ComfortDelGro (CD) less than SMRT. SMRT has two-thirds earnings exposed to Singapore fare business, while CD has 18%.

• No change to ratings – BUY CD, HOLD SMRT. CD offers 20% share price upside to our fair value of S$1.90/share. SMRT is trading at our fair value of S$2.19/share.

Exciting times ahead

Additional platform at Jurong East Interchange

The construction works on the additional platform and tracks are visible now and slated to be completed in 2012. The additional platform will potentially reduced the train's headway time from 3.2 mins to 0 mins and trains approaching the middle platform do not have to arrive and depart from the same platform. It will also ease congestion at the station, as currently the NS line arrivals are unable to match the frequency of EW line during peak periods. LTA also mentioned that they intend to purchase more trains to increase the frequency and shortened the waiting times for MRT. We believe that this is a positive step forward to encourage more people to take the public transport as waiting and traveling time is foremost on commuter's mind.

COE premiums to spike as vehicle quota system is tweaked

LTA has announced that it will change the way it decide on COE supply to ensure that vehicle growth is kept strictly at the targeted rate. The change has caused COE supply for the April to July period to fall 28% and COE premiums are expected to spike with the impending fall in supply. The reduced supply will aid the government's drive in encouraging more people to take the public transport and reduce congestions on the road. We believe more people will switch to taking public transport as owning a car is becoming more expensive and the motor industry's estimate that COE premiums will hit S$30,000 in the near future. SMRT is set to benefit the most with its strong rail network while Comfort Delgro might be hit with higher costs in replacing its fleet of taxis.

Tourism showing strong rebound in 2010

The Singapore Tourism Board (STB) announced a 23% increase in its forecasts for visitor arrivals in 2010, translating to about 12 million tourists. This is good news for the industry as majority of the tourists will be using public transport to travel around Singapore. We feel that MRT and taxi will be the most commonly used, bringing them to the various attractions in Singapore in the shortest time.

Train riderships maintaining strong growth

MRT riderships continue to grow strongly as reflected in the table above registering a 3.98% year on year growth and 2.83% on a rolling basis for Nov-Jan period. Going forward, the opening of more new lines, improved connectivity and affordable fares will continue to fuel riderships growth. LTA expects circle line to add an additional 200,000 to riderships daily when all circle line stations are opened.

On the other hand, bus riderships are showing a decline of 1.11% year on year and a decline of 1.3% on a rolling basis, which could be attributed to the improved rail network and opening of more train stations. Declines will likely continue when circle line (highlighted in the map below) opens next month and we will see more commuters switching over to trains.

We continue to rate SMRT (Buy: Fair value: S$2.19) as our top pick for its strong exposure to the rail network in Singapore over Comfort Delgro (Hold: Fair value S$1.68).

Prospects looking bright

Transportation stocks fared well in 2009. Singapore public transportation stocks have performed well in 2009, in line with market expectations. ComfortDelGro (NOT RATED), for example, saw revenue from both its taxi and rail operations in Singapore grow by 3.9% and 2.5% respectively in FY09, boosted by larger taxi fleet, higher volume of cashless transactions and an increase in average daily rail ridership. While revenue from its bus operations was 6.0% lower due to fare reduction and lower bus ridership, operating profit was up 163.4% due mainly to lower fuel costs. SMRT (BUY, S$2.05 fair value) similarly saw its revenue from train operations increased by 0.7% for 9MFY10 due to higher rail ridership and contribution from Circle Line (CCL) Stage 3, not withstanding the fare reduction exercise. Its bus and taxi operations, on the other hand, reversed the operating losses in 9MFY09 despite a 4.4% and 2.4% decline in segmental sales.

 OVERWEIGHT on Singapore Land Transport sector. Going forward, we continue to view the Singapore Land Transport Sector positively. We believe the Singapore Land Transport (LT) Masterplan, as initiated by government in 2008, would boost the connectivity and usage of public transport significantly. The CCL, part of government’s initiatives to make the rail network the backbone of Singapore’s public transport system, is likely to result in higher rail ridership. According to LTA, the CCL Stage 3 (which started operations in May 2009) will be joined by 11 more stations (CCL Stages 1-2) following the commencement of their operations on 17 April 2010. This is expected to result in a jump in ridership from this stretch of rail network from 30k in last November to 200k commuters. We believe an expected growth in population, higher tourist arrivals from key events such as the opening of the Integrated Resorts may be additional catalysts for a higher ridership number and this in turn will result in higher revenue for public transport operators. In July, PTC is also expected to exercise another fare revision for both bus and train. We are banking on flat-to-marginal increase in average fares, or limited downside from current fare levels. 

SMRT as preferred stock. SMRT is our preferred stock for the sector as we believe it is the key beneficiary from the LT Masterplan (operator of CCL). We see possibility for commuters to switch from other modes of transport to rail when the CCL is progressively opened for operations. We also like its defensive nature, strong operating cashflows and decent yield of 4.1%.