Land Transport Sector - OCBC Investment 2016-06-08: Third Bus Package Finally Put Up for Tender

COMFORTDELGRO CORPORATION LTD S52.SI SMRT CORPORATION LTD S53.SI

Land Transport Sector - THIRD BUS PACKAGE FINALLY PUT UP FOR TENDER

Less than two weeks after Tower Transit launched the first tranche of the first bus package, Singapore’s Land Transport Authority (LTA) yesterday put up the third bus package in Seletar for tender, which comprises 24 existing services and two new services to be announced closer to commencement date.
The Seletar bus package consists of ~420 buses and is expected to grow to ~500 buses in 2023 in tandem with new developments and LTA’s projected growth in ridership. The contract service term is five years with the possibility of a two-year extension on good performance.
All tender submissions will be evaluated through a two-envelope process for quality and price, with more weightage given to the quality aspect of proposals submitted by tenderers, and the tender is open to both local and foreign bus operators.
To ensure a smooth transition, the Seletar bus package will be implemented in two tranches from 1H18, to allow sufficient time for the operator to build up resources (i.e. recruitment and training of staff).
Note the delay in commencement date as the initial planned schedule was for all bus packages to transit to the new bus government contracting model (GCM) from 1 Sep 16 onwards.

The delay in launch of Seletar bus package may see current operators, ComfortDelGro Corporation (CDG) and SMRT Corporation (SMRT), continue operating the affected bus services until the scheduled transition in 1H18 through two possible structures:
1. LTA may temporarily extend the incumbents’ bus operating license for the affected bus services (i.e. incumbents collect revenue and still have ownership over these buses), or
2. after buying over all the required bus assets from incumbents for the GCM transition, LTA may temporarily grant operating rights based on the new GCM to the incumbents for the affected bus services (i.e. LTA collects revenue and owns all bus assets but pay operators annual contracted fees).
On the other hand, we still expect punctual transition to GCM for the remaining nine packages that will remain with the incumbents by 1 Sep 16.
Again, note that the contract terms for the nine packages will be privately negotiated between the incumbents and LTA, and in our view, independent of third package’s schedule.
We also note that SMRT’s Chairman stated in FY16 annual report that SMRT is finalizing with the authorities the proposed contract terms of the GCM, which will commence in Sep 16 for their existing bus services.

With the ongoing regulatory changes in Singapore’s land transport sector, we maintain our NEUTRAL rating on the sector.
Our top pick within the sector is CDG [BUY; FV: S$3.40], given that it is the key beneficiary of the transition to GCM with ~75% market share in Singapore’s public bus industry.
However, for SMRT [HOLD; FV: S$1.55], we remain cautious over the expected increasing rail maintenance-related expenses that will likely weigh on its earnings.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-06-08

OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 3.40 Same 3.40

HOLD Maintain HOLD 1.55 Same 1.55