Land Transport - RHB Invest 2015-12-02: Looking Forward To Positive Regulatory Changes

Land Transport - RHB Invest 2015-12-02: Looking Forward To Positive Regulatory Changes COMFORTDELGRO CORPORATION LTD C52.SI  SMRT CORPORATION LTD S53.SI 

Land Transport - Looking Forward To Positive Regulatory Changes 

  • Ongoing public transport sector reforms should continue in 2016. 
  • Transition of bus operations to GCM should ensure positive margins and free up capital for the incumbents. Elevated competition in the taxi market should subside as private car hire apps are taken under regulatory purview. 
  • ComfortDelGro is our preferred sector exposure for 2016. 
  • SMRT could become top pick if clarity on rail reform implementation is announced. 

 Positive bus margins and sale of bus assets. 

  • The incumbent bus operators have not won the first two bus tenders under the government contracting model (GCM). We do not expect them to win the third tender either. However, we remain positive that they would generate 7-8% operating profit margins (OPM) on core bus operations under the new GCM. 
  • Sales of bus assets back to the Land Transport Authority (LTA) at a 10% discount to book value could translate into a cash inflow of SGD710m for ComfortDelGro (FY16) and SGD207m for SMRT (FY17). 

 Reduced competitive intensity from Uber/GrabCar. 

  • We believe the Government could bring Uber/GrabCar under a regulatory purview in 2016. We have noticed that Uber has gradually lowered benefits offered to its drivers now that the app has attained a critical mass. The LTA could look at removing the regulatory bottlenecks that limit taxi operators from competing fairly with Uber/GrabCar. While we view the launch of Karhoo as positive for taxi operators, certain pre-conditions have to be met before the app can help taxi operators in competing fairly with Uber/GrabCar. 

 Strong growth in rail business for ComfortDelGro. 

  • Stage 2 of the Downtown Line (DTL2), which connects the north-western parts of Singapore to the Central Business District (CBD), commences operations in December. As the two regions have lacked direct rail connectivity till now, we expect strong ridership to boost ComfortDelGro’s rail revenue. 
  • Rail margins, which have declined in line with the preparations for the starting of operations at DTL2, should recover once the latter is fully operational. 

 Rail reforms by 2019. 

  • We believe the LTA may transition the NorthSouth East-West Line (NSEWL) to the new rail financing framework (RFF) by end-2018/early-2019. This is because SMRT Corp (SMRT) is likely to complete the capex related to renewal of NSEWL’s infrastructure by 2018. 
  • There is also SMRT’s liability to purchase the Circle Line’s (CCL) assets worth SGD1.1bn from the LTA in early 2019, which may stress its balance sheet. 
  • While we have not adjusted our estimates for the impending rail reforms, the sale of SMRT’s rail assets to LTA at a discount of 10% to book value in FY19 could add SGD0.50 to our TP. 

 ComfortDelGro remains our preferred sector exposure. 

  • With cheaper valuations and more positive outlook for its bus, taxi and rail operations, we prefer exposure to ComfortDelGro in the domestic land transport sector. 
  • We would become more positive on SMRT once clarity on impending rail reforms is announced.

Shekhar Jaiswal RHB Research | http://www.rhbinvest.com.sg/ 2015-12-02
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