Phillip Securities 2015-08-04: Land Transport Sector - Lower Bus and Train fares in December. REDUCE SMRT & CD.

Lower Bus and Train fares in December 

  • Fare adjustment has traditionally been carried out in April, with an upward adjustment of 2.8% earlier this year. 
  • Lower bus and train fares will result in lower revenue for both domestic PTOs SMRT and SBST. 
  • Retaining existing target prices on CD and SMRT. 

What is the news? 

  • Transport Minister announced yesterday that Train and Bus fares will be cut by up to 1.9% in December, coinciding with the opening of Downtown Line 2 (DTL2). 

How do we view this 

  • Negative impact on both SMRT and SBST (and consequently CD). Reduction in fare will lower revenue for PTOs and hence negatively impact profitability. 
  • Minimal impact on SMRT for FY16F. As SMRT's current FY ends in March 2016, SMRT would experience about one-quarter worth of impact. 
  • No material impact on CD for FY15F. As CD's current FY ends in December 2015, a 1.9% cut in fares in December would not have any material impact to CD's FY15F results. (CD holds a 75.1% stake in SBST.) 
  • Greater negative impact on SMRT, compared to CD. By virtue of all of SMRT's fare revenue being derived from within Singapore, SMRT is more sensitive to the cut in Train and Bus fares. (Fare revenue from domestic Bus and Trains account for 72% of SMRT's revenue, and less than 20% of CD's revenue.) 
  • Adjustments in Bus fares become inconsequential from 3Q 2016 onwards. Bus operations in Singapore are expected to transition to the new GCM in September 2016, which is when the BSOL for both incumbents expire. Profitability will no longer be based on fare-box revenue, but on a competitive cost-plus tender model. 

Investment Actions 

  • Until greater clarity on the exact quantum of the cut in fares, we are retaining our target prices for both SMRT and CD. Noting however, that there is some downward bias on account of lower fare revenue collected. 
  • CD maintained at "Reduce". Stock rating and target price under review, as CD will be announcing 2Q FY15 financial results next week. 
  • SMRT maintained at "Reduce". 1Q FY16 PATMI plunged 10.0%. Bleak outlook as Staff cost, Depreciation and R&M expenses are set to soar in tandem with Bus and Rail fleet/network expansion, higher operating standards to comply with and maintenance of an aging network.

Analyst: Richard Leow, CFTe

Source: http://www.poems.com.sg/