Singapore Land Transport - RHB Invest 2016-06-08: LTA has issued the tender for third bus package

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

Singapore Land Transport: LTA has issued the tender for third bus package

• Singapore’s Land Transport Authority (LTA) has issued the tender for third bus package, also known as the Seletar bus package. The bus package comprises 24 bus services which will be operated from Ang Mo Kio, Yio Chu Kang and Yishun Bus Interchanges, and will be supported by a new Seletar Bus Depot. 
• Construction of the new bus depot will be completed by 3Q17 and implementation of the bus services in this bus package will be carried out in two tranches from the 1H18. The package consists of about 420 buses, growing to about 500 buses in 2023. The operator winning the tender will also operate, manage, and maintain Ang Mo Kio Bus Interchange, Yio Chu Kang Bus Interchange and Seletar Bus Depot.
• As the market already expects that incumbents (ComfortDelGro and SMRT) will not win this tender, a contrary outcome will be positive for the winning incumbent operator. The implementation of Government Contracting Model (GCM) for public busses in Sep 2016 will enable ComfortDelGro and SMRT to earn 7-8% operating margin. Currently, the core bus operation for both operators is losing money. Finalisation of Seletar tender will also pave way for LTA to finalise the sale of buses that are currently owned by ComfortDelGro and SMRT to the government. We maintain that sale of bus assets will be done at 10% discount to book value and the value will be realised by the incumbent operators over a period of five years.
• Post implementation of GCM for public busses, LTA may realign its focus on implementation of the New Rail Financing Framework (NRFF). We believe SMRT’s train business’ transition to the NRFF seems more likely. Transition to the NRFF will not only convert SMRT’s rail business into an asset-light model, but also enables the division to earn a conservative 5% operating margin. While we estimate NRFF to be implemented in 2019, an early announcement of the implementation is also quite likely.
• We reiterate our OVERWEIGHT rating on Singapore land transport sector and have BUY ratings on ComfortDelGro and SMRT with SGD3.40 TP and SGD2.25 TP, respectively.

Shekhar Jaiswal RHB Research | http://www.rhbinvest.com.sg/ 2016-06-08

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

BUY Maintain BUY 2.25 Same 2.25