Land Transport Sector - OCBC Investment 2016-05-23: New regulations unsurprising

Land Transport Sector: OCBC Investment 2016-05-23: New regulations unsurprising COMFORTDELGRO CORPORATION LTD S52.SI  SMRT CORPORATION LTD S53.SI 

Land Transport Sector: Still facing ongoing regulatory changes

  • In-line 1QCY16 results
  • Regulatory-driven catalysts
  • CDG remains our top pick

Stable CDG but maintenance costs weighed on SMRT earnings

  • 1QCY16 results of both the Public Transport Operators (PTOS), ComfortDelGro Corporation (CDG) and SMRT Corporation (SMRT), came in within our expectations, as bus and rail revenue continued to be driven by ridership growth, but offset by the 1.9% fare reduction effective 1 Jan 16. 
  • For CDG, 1Q16 revenue was driven by its bus, rail and taxi segments. However, we think taxi business is starting to the feel the pressure from private hire car services as queue for taxi rentals has dropped to zero. 
  • Looking ahead, DTL2 is expected to be a key revenue driver as ridership grows though unlikely to breakeven until after DTL3 starts in CY17. We also expect it to see more material benefits from lower energy costs on favorable hedging positions for CY16. 
  • For SMRT, 1QCY16 (or 4QFY16) saw rail maintenance-related expenses crept up to 53% of rail revenue, and is expected to sustain around the 50% level for at least the next one to two years. Fare revenue was offset by 1.9% fare reduction and cannibalization impact from DTL2. 
  • We expect the fare reduction, cannibalization impact as well as start-up expenses required to prepare for Tuas West Extension to soften revenue growth outlook in CY16 and CY17.

Focus on regulatory changes for catalysts

  • We believe the focus for Singapore land transport sector should still be on catalysts driven by regulatory changes. 
  • For the bus industry, we think transition to the new bus government contracting model (GCM) is still likely on track to meet the 2HCY16 target. 
  • Recall that with a market share of 75%, CDG will be the key beneficiary of the GCM, as the transition requires the divestment of its bus assets and transfer of future capex obligation to buy new buses to the government. 
  • For the taxi industry, there were concerns over impact of private hire car services on traditional taxi businesses but playing field was leveled slightly with the introduction of new policies to regulate private hire car drivers and vehicles. Nonetheless, we still see disparity relating to applicable standards and pricing structures between traditional taxi business and private hire car services, and this may lead to further loosening of strict taxi standards to further level playing field. 
  • Another key area of focus is the possible transition to the new rail financing framework (RFF). However, the timeline and details remain uncertain.

Maintain NEUTRAL

  • With the ongoing regulatory changes in Singapore’s land transport sector, we continue to maintain our NEUTRAL rating on the sector, as we prefer to wait for better clarity. 
  • 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. 
  • However, for SMRT [HOLD; FV: S$1.55], we are still cautious over the expected increasing rail maintenance- related expenses that will likely weigh on its earnings.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-05-23
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 3.40 Same 3.40
HOLD Maintain HOLD 1.55 Same 1.55