Land Transport Sector - OCBC Investment 2016-08-12: No Surprise From Announced Bus GCM

Land Transport Sector - OCBC Investment 2016-06-08: Third Bus Package Finally Put Up for Tender COMFORTDELGRO CORPORATION LTD S52.SI  SMRT CORPORATION LTD S53.SI 

Land Transport Sector - No Surprise From Announced Bus GCM

  • GCM effective 1 Sep 16.
  • LTA to pay for bus assets progressively.
  • Contract periods range from 2 to 10 years.

Key terms of the new bus GCM

  • LTA announced it has reached agreements with SBS Transit (SBST) and SMRT Corporation (SMRT) on the transition to the new bus government contracting model (GCM), which will come into effect on 1 Sep 16. 
  • Recall under previously announced GCM details, there will be a total of 12 bus packages, of which will three will be tendered out (two already awarded to foreign operators, and one still undergoing evaluation), and the remaining nine to remain with the incumbents (i.e. SBST and SMRT). 
  • Under the newly announced GCM details, the initial nine packages have been reorganized into 11 packages, with contract duration ranging from two to 10 years. And when these negotiated contracts expire, they will also be put out for competitive tendering. 
  • Under GCM, LTA will own all operating assets including buses and lease them to operators. 
  • Currently, SBST owns ~2,900 buses while SMRT owns ~1,100 buses. During the tenures of the negotiated contracts, LTA will lease these buses from the operators by paying a fee equivalent to the depreciation of the buses. In essence, it is the same as LTA buying over the buses at NBV, but over the statutory lifespan.

Expects transition for incumbents’ packages to be on track

  • Under previously announced GCM details, contract tenures of GCM packages are fixed at five years, with the option of two years extension on good performance. Hence, we had also incorporated assumptions for ComfortDelGro (CDG), which owns ~75% of SBST, of LTA paying for CDG’s bus assets over a period of five years, with the total cost amounting to the NBV of the assets. 
  • However, under the new terms, CDG will operate eight packages over two to 10 years, which averages about seven years, and receive S$5,322m in estimated total contract fees (excluding adjustments such as inflation and change in wages). 
  • The progressive payment structure buying bus assets at NBV came in within expectations, except that the payment period is no longer five years, but closer to seven years. 
  • Nonetheless, we believe the on time transition to GCM will improve CDG’s cash flow going forward as depreciation charge becomes a positive cash inflow amount for CDG with LTA’s lease payments. 
  • With 2Q16 results due later this evening, maintain BUY on CDG with an unchanged S$3.21 FV, pending more clarity from management.

Maintain NEUTRAL

  • Under GCM, SMRT will operate three packages over four to seven years and receive S$1,865m in estimated total contract fees (excluding adjustments). In our view, the impact from the transition to bus GCM will likely turn core bus operations sustainably profitable but is not expected to overcome the weak outlook from SMRT’s rail operations. 
  • 1Q16 revenue and operating profit from core bus operations forms only ~19% and 1% of total revenue and operating profit, respectively. In addition, with Temasek’s buyout in progress, we maintain our ACCEPT THE OFFER rating on SMRT, especially since rail remains its core business.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-08-12
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 3.21 Same 3.21
ACCEPT OFFER Maintain ACCEPT OFFER 1.40 Same 1.40