Singapore Land Transport - Maybank Kim Eng Research 2016-08-12: Bus Transition ~ slight bump in the road

Singapore Land Transport - Maybank Kim Eng Research 2016-08-12: Bus Transition: slight bump in the road Singapore Land Transport COMFORTDELGRO CORPORATION LTD C52.SI  SMRT CORPORATION LTD S53.SI 

Singapore Land Transport - Bus Transition: slight bump in the road 

Stock reaction: neutral to slightly negative 

  • We anticipate a neutral to slightly negative stock market reaction to the announced bus transition details. 
  • While the transition to a sustainable bus operating model was widely expected, some may be disappointed with the lack of a one-off cash gain from the sale of bus assets to the government. 
  • Maintain HOLD on ComfortDelGro with an unchanged TP of SGD2.80. 
  • This transition is neutral to the stock of SMRT pending its privatisation by Temasek Holdings. We recommend shareholders of SMRT ACCEPT THE OFFER price of SGD1.68 as it represents a significant 23.5% premium to our fair value estimate of SGD1.36. 

Transiting to a sustainable business model 

  • The Land Transport Authority (LTA) has agreed on the transition terms to a new bus operating regime with the incumbent operators, SBS Transit (SBST, Not Rated), a 75%-owned subsidiary of ComfortDelGro, and SMRT
  • Under the new regime, the LTA will own all operating assets and the operators will run under an asset-light model. However, the regulator will not buy the 4,000 buses that are currently owned by the incumbents. Instead, they will be paid a leasing charge equivalent to the depreciation value of the assets. 
  • Over the entire term of their contracts, SBST and SMRT will be paid SGD5,322m and SGD1,865m respectively, to operate 11 packages of routes with contract lengths ranging from two to ten years. This includes the leasing charges, but excludes adjustments for inflation, changes in wage levels and fuel costs, service variation, and incentives. 

No windfall from bus asset sale 

  • We believe the market may be disappointed with the lack of a one-off cash gain from the sale of the operators’ bus assets to the government. 
  • While we were not expecting a one-off windfall from the sale of bus assets, our forecasted balance sheet improvements from a progressive payment for the assets over a five-year period will have to be moderated. This is because the leasing payments will only match depreciation charges for bus assets with a lifespan of 17-20 years. 

Comparable contract value to tendered packages 

  • While profitability of the new bus contracts cannot be determined reliably at this point in time, our estimates show that they are broadly similar to contract values of the first two bus packages awarded to Tower Transit and Go-Ahead Group. This implies that a competitive market-based margin should be achieved. However, we caution that contract values for new entrants include one-off pre-operations costs. 
  • Profitability for all operators can be enhanced from incentives by achieving better service standards. 
  • The varying lengths of contracts, scope of work and addition of new services implies that they cannot be directly compared to revenue under the old regime.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-12
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 2.80 Same 2.80
ACCEPT OFFER Maintain ACCEPT OFFER 1.36 Same 1.36