Singapore Land Transport Sector:First Bus package up for tender;Rail Financing Framework still unresolved

Sector Overview

    The Land Transport Sector under our coverage consists of ComfortDelGro Corp Ltd (CD) and SMRT Corp Ltd (SMRT). The Land Transport Sector in Singapore is a duopoly between CD and SMRT. Both are multi-modal public transport operators (PTOs), providing Mass Rapid Transit (MRT), Light Rail Transit (LRT), buses and taxi services. CD provides fare-based public transport services in Singapore through its subsidiary, SBS Transit Ltd (SBST).

    What is the news?

    For the recent quarter, CD announced 3QFY14 results (FYE Dec), while SMRT announced 2QFY15 results (FYE Mar). Following the quarterly financial announcements for CD and SMRT, we give an overview of the current landscape of the Singapore Land Transport sector, and the outlook for the sector.

    Quarterly overview of the sector

    Revenue growth across PTOs. Fare adjustment and higher ridership contributed to revenue growth for both SBST and SMRT this quarter.

    SMRT: Fare business returned to profitability. This came about with MRT business returning to profitability and Bus business paring losses. However, free cash flow for SMRT is weak.

    CD: Continued to deliver growth. Bus (50%) and Taxi (38%) businesses continue to be the largest revenue contributors for the Group.

    Uncertainty over RFF transition remains. No update was given by SMRT Management on negotiations with LTA on the transition to the new RFF.

    First Bus package has been put up for tender. The "Bulim bus services" was put up for tender by the LTA on 3 October.

    Outlook for the sector

    Do not assume same revenue growth next year. Fare revenue was lifted due to the fare adjustment exercise in April. If there is no fare revision in CY2015, then fares will remain stagnant and %y-y growth in revenue (from April 2015 to March 2016) could be muted.

    More MRT lines to open up. Under the LTMP 2013, the Government has pledged to open a new train line or line extension nearly every year until 2021.

    Our top-pick: ComfortDelGro Corp Ltd

    CD remains our top pick for the sector for its (1) existing profitable overseas exposure, (2) prior experience in bidding for and operating Bus services under the contracting model, (3) net cash position allowing for earnings-accretive acquisitions and (4) relative under-valuation (~20x NTM P/E) compared to SMRT (~26x NTM P/E).