Land Transport Sector - OCBC Investment 2015-11-23: Downgrade to NEUTRAL on mixed outlook

Land Transport Sector: OCBC Investment 2015-11-23: Downgrade to NEUTRAL on mixed outlook COMFORTDELGRO CORPORATION LTD S52.SI  SMRT CORPORATION LTD S53.SI 

Land Transport Sector: Downgrade to NEUTRAL on mixed outlook 

 Subdued outlook for SMRT 
 Sector in state of flux 
 Downgrade to NEUTRAL 

CY15 had been a tough one for SMRT 

  • This year had been challenging for SMRT as train disruptions occurred one after another. It was also a year where SMRT was fined S$5.4m for possibly the worst-ever train breakdown in Singapore’s history and earnings eroded by increasing expenses to ramp up its preventive and corrective maintenance. 
  • For 1HFY16, PATMI declined 3.7% YoY to S$45.9m due to weak 1QFY16 results that was marred by train losses on higher rail maintenance-related expenses. 
  • Looking ahead, as we expect further increase in rail maintenance-related expenses as a proportion rail revenue, and the need to increase headcount in preparation of Tuas West Extension, we think outlook is likely to remain muted for SMRT (aside from any RFF transition). 
  • On the other hand, CDG continues to exhibit its key characteristic of stability. For 9M15, PATMI rose 6.3% to S$233.7m, driven mainly by bus and taxi segments. 
  • With DTL2 due to start on 27 Dec, we see further upside on revenue but we think it takes time for ridership to mature. That said, with a diversified revenue base, we expect CDG to continue its stable growth in CY16. 

Mixed outlook on land transport sector 

  • With the conclusion of General Elections 2015 back in Sep, Singapore’s new cabinet was sworn in on 1 Oct, which includes the appointment of a new Minister for Transport, Mr. Khaw Boon Wan. 
  • Accordingly, we have identified four key areas that are highly likely to be of Mr. Khaw’s focus over the next few years: 
    1. addressing regulatory matters for the new and emerging private car-hire services, 
    2. completing transition to GCM within stipulated timeline, 
    3. improving rail reliability to prevent massive rail networkwide failure (e.g. 7 Jul incident), and 
    4. making progress on transition to the new rail financing framework (RFF). 
  • However, the uncertainties over the regulatory changes for the private car-hire industry as well as the timeline of RFF transition continue to limit the visibility over the impact on both CDG and SMRT. 

Downgrade to NEUTRAL 

  • With Singapore’s Land Transport sector currently in a state of flux on reasons stated above, and on mixed outlook, we downgrade the sector to NEUTRAL but will revisit our view once we see further clarity over the mentioned uncertainties. 
  • Within the sector, we believe CDG [HOLD; FV: S$2.99] is the more stable company with diversified revenue base and geographical presence. Hence, we believe regulatory changes in Singapore are unlikely to impact CDG materially. 
  • For SMRT [HOLD; FV: S$1.43], we think the negatives of increasing maintenance-related expenses ahead have already been largely priced-in by the market and we believe it is currently fairly valued. 
  • While the timeline is still unclear, note that our raw estimate on the potential upside from RFF transition is ~35% to our current FV, based on certain assumptions stated above.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-11-23
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 2.99 Same 2.99
HOLD Maintain HOLD 1.43 Same 1.43