Public Transportation - CIMB Research 2015-10-13: 8 bidders shortlisted for Loyang bus package

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Transport Sector SMRT CORPORATION LTD S53.SI  COMFORTDELGRO CORPORATION LTD C52.SI 

Public Transportation 8 bidders shortlisted for Loyang bus package 

• 8 bidders shortlisted by LTA for the Loyang package. 
• Bidding prices are S$498m-$631m, with UK bus operator Go-Ahead the most competitive, SBS Transit the fourth-lowest and SMRT the sixth-lowest. 
• Our EPS forecasts and target prices for ComfortDelGro and SMRT not affected if they fail to win. 

8 bidders shortlisted to potentially run Loyang bus package 

• LTA announced that 8 bidders were shortlisted for the Loyang bus package, the 2nd public bus contract under the government contracting model (GCM). Primarily serving the Punggol and Pasir Ris areas, the package will consist of 25 services and c.400 buses when implemented in 2H16 and will grow to about 500 buses in 2021. The final bidding outcome could be announced by end-15. 

The incumbent’s bids not more competitive than new players’ 

• The bidding prices for the 5-year operating contract submitted by the 8 players range from S$498m to S$631m, with a median bid of S$558m (see table below). Unlike the previous tender for the Bulim package, the bidding prices submitted by the incumbent SBS Transit and SMRT this time for Loyang are not more competitive than the rest, likely due to different cost estimates and understanding of the routes. 

Go-Ahead may have a good chance of winning 

• It seems that UK bus operator Go-Ahead stands a better chance of winning the Loyang contract given its most competitive bidding price and proven track record in the UK market. Go-Ahead is a key competitor of ComfortDelGro in UK with 24% market share versus ComfortDelGro’s 18%. It will also serve well the LTA’s intention to introduce more competition to Singapore’s public bus market if Go-Ahead wins. 

No negative for ComfortDelGro’s and SMRT’s earnings 

• Our EPS forecasts for ComfortDelGro and SMRT will not be affected if they fail to secure the contract as we did not assume they win any in the first place. We believe Go-Ahead having the most competitive bidding price is a good sign for Singapore’s future bus margin as the UK bus operator has an operating margin of more than 9% in its home market versus Singapore’s historical margin of 3-4%. 

ComfortDelGro remains our top pick for the sector 

• ComfortDelGro (Add, target price: S$3.39) is our top pick in the Singapore land transport sector for its good business diversification, strong balance sheet and overseas growth initiatives. As at 30 Jun 15, ComfortDelGro had negligible net debt while SMRT had a high net gearing of 0.79x. ComfortDelGro’s 18.0x CY16 P/E is more compelling than SMRT’s 23.8x.

Highlighted companies 

ComfortDelGro ADD, TP S$3.39, S$3.08 close 

• Key re-rating catalysts for ComfortDelGro include 
  1. the earnings contribution from the Downtown Line stage II (slated to commence operation by end-15), and 
  2. potential overseas M&As. 

SMRT Corporation REDUCE, TP S$1.28, S$1.39 close 

• Key de-rating catalysts for SMRT include: 
  1. protracted rail operating losses due to higher repair and maintenance expenses for its ageing rail system, and 
  2. possible ridership diversion from the Downtown Line stage II.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-10-13

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