Land Transport Sector - Phillip Securities 2018-09-11: Taxi Stabilising & Fare Increase For Public Transport


Land Transport Sector - Taxi Stabilising & Fare Increase For Public Transport

  • Maintain OVERWEIGHT on the Land Transport sector due to positive industry restructuring and the worst being over for the Taxi industry.
  • The Public Transport Council (PTC) says that fare increase will be up to 4.3%.
  • Maintain ACCUMULATE on ComfortDelGro (SGX:C52); unchanged target price of $2.78.
  • Keeping our target price for now, until exact quantum of fare increase is announced (our current model assumes 0% change in Rail fares).

What is the news?

  • The Land Transport Authority (LTA) has published motor vehicle population and Taxi Driver Vocational Licence (TDVL) data for July 2018.
  • The Public Transport Council (PTC) has commenced the annual 2018 Fare Review Exercise. Public transport operators may submit their fare applications by Oct. 1, and the PTC will announce its decision on the fare adjustment quantum in 4Q18.

~ ~ Where SG investors share

The Positives

+ Marginal +0.1% m-o-m growth in taxi population.

  • ComfortDelGro Taxi was the only operator whose fleet grew m-o-m (+69 taxis). This is on the back of the recent announcement to purchase a total of 1,200 taxis (replacement and expansion capex). All other operators’ fleets contracted m-o-m. The Singapore taxi fleet has a net m-o-m increase of +12 taxis.

+ Rate of y-o-y decline in taxi population continues to show sign of bottoming.

  • Y-o-y contraction had peaked in April 2018 at -19%, and the pace of contraction has slowed down for three consecutive months. We believe the worst is over for the Taxi industry, in view of the positive impact following the exit of Uber and resultant restructuring of the ride-hailing industry. However, unlikely to see y-o-y growth by the end of 2018.

+ Rental cars y-o-y growth continues to taper; second consecutive month of single-digit growth from double-digit growth since December 2013.

  • Rental cars population has contracted m-o-m and YTD. We were expecting population to start contracting, on the basis of earlier media reports of unhired cars from Lion City Rentals (LCR) being put up for sale in the used-car market. 
  • In addition, only 51% of private hire chauffeurs had passed the Private Hire Car Driver's Vocational Licence (PDVL) by the June 30 deadline. This is a material negative impact to the available pool of licensed drivers able to rent cars to offer private hire chauffeur service.

+ momentum for TDVL issued has been maintained.

  • The total number of TDVL issued for 7M18 YTD has doubled y-o-y. This has been sufficient to offset the natural attrition of licence expiries. The number of valid TDVL holders remains flat at +1.0% YTD. 
  • We maintain our view that a sustained average of about 400 new TDVLs issued monthly would be sufficient to sustain growth in number of valid TDVL holders.

+ SBS Transit's Rail segment will benefit from higher fares.

  • Direct impact will be an earlier breakeven for Downtown Line (DTL). Recall that the full DTL commenced operations in October 2017. DTL breakeven is expected in 2Q19 or 3Q19. 
  • Note that fare increase does not affect SBS Transit (SGX:S61)'s Bus segment revenue, as it is on the tendered government bus contracting model (BCM).

Investment Action

  • We maintain Overweight on the Land Transport sector, on the positive industry restructuring following the exit of Uber and the worst being over for the Taxi industry. 
  • We maintain our ACCUMULATE rating on ComfortDelGro (SGX:C52), with unchanged target price of $2.78.
  • Our previous Land Transport sector report was published on July 30. See report: Land Transport Sector - Taxi Turnaround Insight. 

Appendix - 

Background to the Fare Formula

New fare formula announced on March 22, 2018

  • Recall that the PTC had announced the revision to the existing fare formula on March 22, 2018. The new fare formula would include a Network Capacity Factor (NCF). The revised fare formula, to be applied from 2018 to 2022, is: 
Maximum Fare Adjustment = 0.5 cCPI + 0.4 WI + 0.1 EI – 0.1% + NCF
  • cCPI = Year-on-year change in core Consumer Price Index;
  • WI = Year-on-year change in Wage Index measured by the Average Monthly Earnings (National Average), adjusted for any change in the employer’s CPF contribution rate;
  • EI = Year-on-year change in Energy Index which is a composite index derived from diesel price and electricity tariff; and
  • NCF = Year-on-year change in Network Capacity Factor which measures capacity provision relative to passenger demand for the entire public transport system;
  • 0.1% = Productivity Extraction Factor component that is based on half of the productivity gain achieved by the PTOs.

Previous formula was proposed and accepted in November 2013

  • The previous formula from 2013 to 2017 was: 
Maximum Fare Adjustment = Price Index - Productivity Extraction = (0.4 cCPI + 0.4 WI + 0.2 EI) – 0.5%
  • Under the previous formula, there was a cumulative 8.3% fare reduction in the previous three consecutive years. This was mainly due to the lower energy costs.

Prior formula since 2005 did not have an Energy Index component

  • Prior to 2013, the fare formula proposed in 2005 was: 
Maximum Fare Adjustment = Price Index - Productivity Extraction = ( 0.5 CPI + 0.5 WI ) – 1.5%
  • The Fare Review Mechanism Committee Report cited the change in cost structure of the public transport operators between 2005 and 2011. Fuel costs had increased disproportionately more than other costs. That resulted in the Energy Index being included in the 2013 revision to the fare formula.

Richard Leow CFA Phillip Securities Research | 2018-09-11
SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 2.780 Same 2.780