Land Transport Sector - OCBC Investment 2016-03-09: Waiting for better clarity over reforms

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

Land Transport Sector: Waiting for better clarity over reforms

• Decent 4QCY15 results
• Keep a lookout on budget day
• CDG still our top pick 

Growth driven by taxi, rail and bus segments 

• 4QCY15 revenue for the two Public Transport Operators (PTOS), ComfortDelGro Corporation (CDG) and SMRT Corporation (SMRT), continued to be driven mainly by Bus, Rail and Taxi segments, with bus and rail revenue growth largely due to ridership growth while taxi was due to higher rental income. 
• For CDG, FY15 ended steadily as its results were within our expectations, and Downtown Line Phase 2 (DTL2) opened as scheduled in late Dec 15. 
• Operationally, DTL2 is expected to be a key revenue driver ahead while at the same time recording more material benefits from lower energy costs due to more favorable hedging positions for CY16. 
• For SMRT, 4QCY15 (or 3QFY16) was a pleasant surprise with a slowdown in pace at which operating expenses grew due to cheaper energy costs. 
• Nonetheless, we are still cautious about SMRT’s operations ahead, as rail-maintenance related expenses are likely to hit 50% of rail revenue by 1QCY16 (or 4QFY16). This is in addition to the expected weakness in revenue due to cannibalization from DTL2 as well as start-up expenses required to prepare for Tuas West Extension, which is expected to launch in CY16. 

Structural reforms are the key catalysts 

• All said, while the PTOs’ outlook may seem operationally unexciting, we believe the focus should be on the impending structural reforms, which in our view will be the key catalysts for the land transport sector in Singapore ahead. 
• As we highlighted before, there are four key areas of focus for the government: 
  1. addressing regulations of private car-hire services, 
  2. transition to the new bus government contracting model (GCM), 
  3. improving rail reliability, and 
  4. transition to the new rail financing framework (RFF). 
• Out of these four areas, we think the transition to GCM and RFF are the more significant ones for CDG and SMRT, respectively. 
• The timeline of the transition to GCM is clearly defined to be in 2HCY16, but the timeline and details remain uncertain for the transition to RFF. 
• We believe the key information the market lacks on GCM is how LTA will pay for these bus assets – in lump sum or progressively over a period of time. 
• With a combined (both PTOs) NBV of bus assets estimated at more than S$1.0b, we believe Singapore’s 2016 budget will give a much clearer picture as any spending of such magnitude will be a key point of mention by the minister. 
• As for RFF, we expect any material details to be announced only when the GCM transition is more or less completed, at the earliest. 

Maintain NEUTRAL for now 

• As we wait for certainty over the details of these reforms in Singapore’s Land Transport Sector, we maintain NEUTRAL 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. 
• For SMRT [HOLD; FV: S$1.51], we remain cautious as increasing expenses will likely weigh on its earnings. 

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-03-09

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

HOLD Maintain HOLD 1.51 Same 1.51