The LTA recently re-iterated the possibility of introducing competition in the bus services industry. However, as with before, we do not anticipate any changes to the operating landscape in the medium term unless the government decides how it wants to strike a balance between a free-market and government assisted model. For the near-term, the street is awaiting the recommendations from the fare review committee and has already factored in some level of increase. That said, any further delays from this committee could lead to continued losses for both PTOs and even asset impairments for SMRT. We downgrade the sector to NEUTRAL in light of this possibility but do not anticipate further deterioration in the share prices for both ComfortDelgro and SMRT at this juncture. Maintain our HOLD ratings on both SMRT [HOLD; FV:S$1.45] and ComfortDelgro [HOLD; FV:S$1.95] although we favour the latter for its more attractive overseas ventures.
Recent sell-off by SLF re-ignite concerns
The recent partial stake sell-off by ComfortDelgro’s major shareholder, the Singapore Labour Foundation, re-ignited concerns over the future of SG’s public transportation sector and by extension, ComfortDelgro and SMRT. While the LTA recently re-iterated the possibility of competition in the industry, it is unlikely to occur in the medium term.
Threat of new entrant non-existent at this point
The possibility of opening up the basic bus service industry to competition has been floated by the government since 2008 but it has remained as status quo since then. While the recent announcement over the funding and construction of a second bus depot by LTA (a key infrastructure for bus operations) seems like a step in the right direction, it was really driven by necessity resulting from additional buses under the Bus Service Enhancement Programme (BSEP).
Government has to decide balance between fare increases and subsidies
Ultimately, the government has to decide the balance between fare increases and the amount of subsidies to grant. Both PTOs are experiencing widening operating losses for their core SG bus operations as fares have failed to keep pace with operating expense increases and government subsidies are strictly profit-neutral. Either fares are allowed to increase to match the growth in operating expenses or further subsidies have to be given (i.e. no longer be profit neutral).
Fare review committee decision more important for near-term
The 13-member fare review committee convened last year has yet to reveal its recommendations but the street has already priced in some level of increase. If the decision is delayed further, we could see continued losses for both PTOs and even asset impairments for SMRT.
Downgrade sector to NEUTRAL
Back at the end of 2012, we had upgraded the land transportation sector to OVERWEIGHT as we had anticipated more supportive measures for the PTOs and a quicker implementation of a long-overdue fare increase. However, these developments had failed to materialize and operating losses continued to widen. Therefore, we downgrade the sector to NEUTRAL in light of the near-term operational challenges for SG. That said, we do not expect further deterioration in the share prices of both ComfortDelgro and SMRT as most of the weaknesses should have already been priced in by the market. Maintain our HOLD ratings on both SMRT [HOLD; FV:S$1.45] and ComfortDelgro [HOLD; FV:S$1.95] although we favour the latter for its more attractive overseas ventures.
The recent partial stake sell-off by ComfortDelgro’s major shareholder, the Singapore Labour Foundation, re-ignited concerns over the future of SG’s public transportation sector and by extension, ComfortDelgro and SMRT. While the LTA recently re-iterated the possibility of competition in the industry, it is unlikely to occur in the medium term.
Threat of new entrant non-existent at this point
The possibility of opening up the basic bus service industry to competition has been floated by the government since 2008 but it has remained as status quo since then. While the recent announcement over the funding and construction of a second bus depot by LTA (a key infrastructure for bus operations) seems like a step in the right direction, it was really driven by necessity resulting from additional buses under the Bus Service Enhancement Programme (BSEP).
Government has to decide balance between fare increases and subsidies
Ultimately, the government has to decide the balance between fare increases and the amount of subsidies to grant. Both PTOs are experiencing widening operating losses for their core SG bus operations as fares have failed to keep pace with operating expense increases and government subsidies are strictly profit-neutral. Either fares are allowed to increase to match the growth in operating expenses or further subsidies have to be given (i.e. no longer be profit neutral).
Fare review committee decision more important for near-term
The 13-member fare review committee convened last year has yet to reveal its recommendations but the street has already priced in some level of increase. If the decision is delayed further, we could see continued losses for both PTOs and even asset impairments for SMRT.
Downgrade sector to NEUTRAL
Back at the end of 2012, we had upgraded the land transportation sector to OVERWEIGHT as we had anticipated more supportive measures for the PTOs and a quicker implementation of a long-overdue fare increase. However, these developments had failed to materialize and operating losses continued to widen. Therefore, we downgrade the sector to NEUTRAL in light of the near-term operational challenges for SG. That said, we do not expect further deterioration in the share prices of both ComfortDelgro and SMRT as most of the weaknesses should have already been priced in by the market. Maintain our HOLD ratings on both SMRT [HOLD; FV:S$1.45] and ComfortDelgro [HOLD; FV:S$1.95] although we favour the latter for its more attractive overseas ventures.
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