Category: SMRT
Land Transport – OSK DMG
Positive Paradigm Shift
The Land Transport Authority (LTA) introduced the new bus operating model last night. The details have yet to be finalized and financial impact remains uncertain at this point. We opine positively towards the move as it creates a sustainable operating environment. For the two local incumbent operators, we expect them to enjoy profit boost going forward, from year 2016 to 2020. We continue to favour ComfortDelGro.
A gradual transition. The cost-plus model will kick start when the operating licenses for the two existing operators expires on 31 Aug 2016. Initially, only about 20% of the buses would be tendered out publicly (tender open to foreign operators e.g. Veolia, Keolis) for a five year operating contract with two year extension possibility. The remaining 80% of buses will continue to be operated by the two incumbents under the new model (ie contractual price to be negotiated).
Going asset light. Under the new model, LTA will assume ownership of all the us operation assets. This implies that at certain point of time, LTA will buy over the existing assets from the two local operators. As of the end of 2013, ComfortDelGro’s bus operating assets were recorded at around SGD827m book value whereas SMRT’s was estimated at about SGD250m. However the lack of details makes it difficult to ascertain the actual financial impact. We think the positive impact on ComfortDelGro will be much larger than on SMRT.
Earnings boost for both operators. We expect both ComfortDelGro and SMRT to be better off from year 2016 to 2020 even if they were to lose the first open tender since they have been barely profitable under the existing model. In our opinion, the contractual price (to be negotiated) for this five-year grace period under the new operating model is likely to lift both incumbents’ EBIT margins closer to 8% which is the industry norm, in turn lifting their profits.
Upgrade sector rating to Neutral; Prefer ComfortDelGro. In view of this positive news we upgrade the sector rating from Underweight to Neutral and raise our fair value estimates for both ComfortDelGro and SMRT respectively to SGD2.60 and SGD1.17. However, we prefer the former for its strong track record of operating under the cost-plus model which potentially leads to higher chance of tender wins as well as better operating margins.
Land Transport – OSK DMG
Positive Paradigm Shift
The Land Transport Authority (LTA) introduced the new bus operating model last night. The details have yet to be finalized and financial impact remains uncertain at this point. We opine positively towards the move as it creates a sustainable operating environment. For the two local incumbent operators, we expect them to enjoy profit boost going forward, from year 2016 to 2020. We continue to favour ComfortDelGro.
A gradual transition. The cost-plus model will kick start when the operating licenses for the two existing operators expires on 31 Aug 2016. Initially, only about 20% of the buses would be tendered out publicly (tender open to foreign operators e.g. Veolia, Keolis) for a five year operating contract with two year extension possibility. The remaining 80% of buses will continue to be operated by the two incumbents under the new model (ie contractual price to be negotiated).
Going asset light. Under the new model, LTA will assume ownership of all the us operation assets. This implies that at certain point of time, LTA will buy over the existing assets from the two local operators. As of the end of 2013, ComfortDelGro’s bus operating assets were recorded at around SGD827m book value whereas SMRT’s was estimated at about SGD250m. However the lack of details makes it difficult to ascertain the actual financial impact. We think the positive impact on ComfortDelGro will be much larger than on SMRT.
Earnings boost for both operators. We expect both ComfortDelGro and SMRT to be better off from year 2016 to 2020 even if they were to lose the first open tender since they have been barely profitable under the existing model. In our opinion, the contractual price (to be negotiated) for this five-year grace period under the new operating model is likely to lift both incumbents’ EBIT margins closer to 8% which is the industry norm, in turn lifting their profits.
Upgrade sector rating to Neutral; Prefer ComfortDelGro. In view of this positive news we upgrade the sector rating from Underweight to Neutral and raise our fair value estimates for both ComfortDelGro and SMRT respectively to SGD2.60 and SGD1.17. However, we prefer the former for its strong track record of operating under the cost-plus model which potentially leads to higher chance of tender wins as well as better operating margins.
SMRT – Maybank Kim Eng
Smaller bus loss gives cheer
- Bus operations posted sharp drop in loss but fare-based business still in the red. Fare hike implemented in April will ensure continued improvement in profitability.
- Earnings raised by 17-29% to reflect lower cost estimates.
- Maintain SELL with higher TP of SGD0.65.
What’s New
SMRT reported net profit of SGD16.9m for 4QFY3/14, marginally above our expectations. The boost came from its bus operations, which recorded a sharp reduction in operating loss to SGD4.4m (4QFY3/13: SGD11.9m) in what appeared to be better cost control. Net gearing rose to 60% (FY3/13: 8.2%) as CAPEX more than doubled to SGD652m (FY3/13: SGD251m). Overall, the fare-based business remained in the red for the quarter, chalking up operating loss of SGD3.7m. Full-year DPS was trimmed to 2.2 SGD cts (FY3/13: 2.5 SGD cts), translating to a payout of 54%.
What’s Our View
Following the fare hike last month, we expect SMRT’s fare-based business to continue to improve in the coming quarters. However, as highlighted in our earlier report (note), the estimated annual net benefit of SGD13.2m is insufficient to fully compensate for losses at its fare-based business (FY3/14: SGD25.0m). Therefore, a transition to a sustainable model is still badly needed. We have not factored this into our forecasts. The sharp decline in FY3/17E EPS reflects our expectations for traffic cannibalisation when Stage 2 of the Downtown Line (DTL) opens in 2016. Management will host an analyst briefing today and we expect the discussion to centre on the transition of its fare-based businesses. We raise our FY3/15E/16E/17E earnings forecasts by 28%/17%/29%, albeit off a low base, to reflect lower cost estimates. We reiterate our SELL call but raise our TP to SGD0.65 (from SGD0.60), based on 14x FY3/15E-17E P/E. In our view, it is speculative to conclude that the transition terms for the business model will be favourable.
SMRT – Maybank Kim Eng
Share price surged… avoid the hype
- Share price surged 18.5% to its highest since 10 Dec.
- While a favourable transition of its business model is likely, this surge is speculative in the absence of announcements by the regulators or operators.
- Maintain Sell with TP of SGD0.60, based on 14x average EPS for FY3/14-16.
SMRT’s share price surged…
SMRT’s share price surged by 18.5% to close at its highest in almost five months, stoking speculations of impending corporate developments. In response to this, the stock exchange’s surveillance department has issued a query to which SMRT has replied that they are not aware of any news that has caused the price surge.
… Avoid the hype; maintain SELL
In our view, there are two possible corporate developments:
1) Nationalisation of SMRT via a general offer. This allows SMRT to run as a non-profit organisation. However, we think this is unlikely as Singapore’s Transport Minister had previously argued against nationalisation on ground that nationalisation may lead to higher fares and become a burden on taxpayers.
2) Favourable transition to new business model for fare-based business. This is a more likely scenario. SMRT’s core fare-based business suffered an operating loss of SGD32m in 2013 and is expected to remain a key drag to profitability in the future. While a change is imminent, it is highly speculative to conclude that the terms will be favourable to shareholders. In particular, we are concerned over the treatment of the asset purchase obligations under the old rail financing regime (note). In the absence of material announcements, we advise investors to stay cautious. SMRT trades at a rich valuation of 30x FY3/15E P/E. Maintain SELL with TP of SGD0.60.
SMRT – Maybank Kim Eng
Share price surged… avoid the hype
- Share price surged 18.5% to its highest since 10 Dec.
- While a favourable transition of its business model is likely, this surge is speculative in the absence of announcements by the regulators or operators.
- Maintain Sell with TP of SGD0.60, based on 14x average EPS for FY3/14-16.
SMRT’s share price surged…
SMRT’s share price surged by 18.5% to close at its highest in almost five months, stoking speculations of impending corporate developments. In response to this, the stock exchange’s surveillance department has issued a query to which SMRT has replied that they are not aware of any news that has caused the price surge.
… Avoid the hype; maintain SELL
In our view, there are two possible corporate developments:
1) Nationalisation of SMRT via a general offer. This allows SMRT to run as a non-profit organisation. However, we think this is unlikely as Singapore’s Transport Minister had previously argued against nationalisation on ground that nationalisation may lead to higher fares and become a burden on taxpayers.
2) Favourable transition to new business model for fare-based business. This is a more likely scenario. SMRT’s core fare-based business suffered an operating loss of SGD32m in 2013 and is expected to remain a key drag to profitability in the future. While a change is imminent, it is highly speculative to conclude that the terms will be favourable to shareholders. In particular, we are concerned over the treatment of the asset purchase obligations under the old rail financing regime (note). In the absence of material announcements, we advise investors to stay cautious. SMRT trades at a rich valuation of 30x FY3/15E P/E. Maintain SELL with TP of SGD0.60.