ComfortDelgro - DBS Research 2017-04-20: SBS Transit Wins 3rd Bus Package Tender

ComfortDelgro - DBS Vickers 2017-04-20: SBS Transit wins 3rd Bus Package tender COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelgro - SBS Transit wins 3rd Bus Package tender

  • SBS Transit wins 3rd Bus Package with S$480.3m contract pricing.
  • 26 bus services, of which 13 services are currently operated by SBST.
  • A pleasant surprise; expect minimal 1-2% accretion to forecasts.
  • Maintain BUY, TP: S$2.94.

SBS Transit wins 3rd bus package. 

  • The Land Transport Authority announced the results of the third bus package (Seletar Bus Package) on 19 April 2017; and this was awarded to SBS Transit (SBST), a subsidiary of ComfortDelGro (CD).

Contract valued at S$480.3m. 

  • SBST's tender price was at S$480.3m for the 5-year contract. The bid was the lowest among the ten bids received. 
  • The contract value includes the one-off pre-operation costs, total service fee and lease charges for assets provided by LTA. However it excludes adjustments for inflation, changes in wage levels and fuel costs, incentive payments and service variations.

26 bus services within contract. 

  • There are a total of 26 bus services within the Seletar Bus Package, of which two will be new services. Of the remaining 24, SBST is currently operating 13 services, while SMRT currently runs the other 11 services. The bus services will be handed over to SBST in five tranches from 1Q of 2018 to smoothen the transition process.
  • As per the earlier two contracts awarded, this tender underwent a two-envelope tender approach put in place by the LTA. The two-envelope approach included factors such as quality and price with greater weightage on the former.

A pleasant surprise. 

  • We had earlier envisaged that the three contracts put up for competitive tender would be won by non-incumbents, given the drive towards a more vibrant and competitive environment. With SBST having clinched this latest contract, that leaves the bus contract with four operators, the other three being SMRT, Tower Transit and Go-Ahead.

Lowest price won. 

  • SBST and SMRT had submitted the lowest and second lowest bids respectively, which was not surprising given their incumbent status. This was a departure from the second tender (for Loyang Bus Package) where SBST and SMRT submitted the fourth and sixth lowest bids.
  • We believe this could be due to more certainty on the operations, given that this tender is the only one closed after the transition to the contracting model on 1 September 2016.

Transition only in 2018, leaving forecasts unchanged for now. 

  • With the phased transition and with it only taking place from 2018, we are keeping our forecasts unchanged for now. That said, we estimate that this should only have an impact of c.1-2% to our forecasts.

Maintain BUY, TP: S$2.94. 

  • We maintain our BUY recommendation on CD given its ability to deliver steady and consistent growth. 
  • While the market skepticism over its taxi operations could linger for a while, we believe its stands out as a stronger party among the taxi operators to weather the headwinds. 
  • Furthermore, the implementation of tighter regulations on private hire cars from 1 July should help to level the playing field.

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-04-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.940 Same 2.940