Thursday 11 December 2014

Land Transport Sector

OCBC on 3 Dec 2014

The journey for Singapore’s Public Transport Operators (PTOs), namely ComfortDelGro Corporation Limited (CDG) and SMRT Corporation Limited (SMRT), has been smooth thus far in 2014. CDG showed stable growth while SMRT exceeded expectations for all three quarters to date for the year. Looking at the fundamental factors for the growth and improvements in operating margins, we believe both CDG and SMRT are on track to meet our 4QCY14 projections. We believe the momentum seen in 2014 will sustain into 2015 based on both near-term and longer-term factors. However, the key idea to take note is the potential increase in Singapore’s bus and rail fares in 2015. Coupled with the continued efforts put in by the PTOs to manage costs and increase productivity gains, we think the outlook for the PTOs remains positive going into 2015, as we think profitability will improve further. Hence, we maintain OVERWEIGHT on land transport sector, while reiterating BUY rating on both CDG (FV: S$3.03) and SMRT (FV: S$1.70).

PTOs to end 2014 with a smooth ride
The journey for Singapore’s Public Transport Operators (PTOs), namely ComfortDelGro Corporation Limited (CDG) and SMRT Corporation Limited (SMRT), has been smooth thus far in 2014, at least based on what we saw from their first three quarters’ results. CDG continued to show stable growth as its results for all three quarters of 2014 came in within our expectations. 9M14 PATMI grew 8.1% YoY on higher revenue. Its operating margins for 1Q14 through 3Q14 remained stable between 10% and 12% as labour expenses stabilized at ~33% of total revenue. Separately, 2014 had been a year full of pleasant surprises from SMRT as its results for all three quarters for the year exceeded our expectations. After six consecutive quarters of operating losses, fare business finally turned profitable driven by higher ridership and higher average fares in 2QFY15 (3QCY14). The key factors for profitability were disciplined cost management, productivity gains as well as lower electricity and diesel costs, which boosted overall operating margins from 7.6% in 4QFY14 (1QCY14) to 10.6% in 2QFY15. In all, we believe both CDG and SMRT are on track to meet our 4QCY14 projections.

Several factors to sustain momentum in 2015
We believe the momentum seen in 2014 will sustain into 2015 based on both near-term and longer-term factors. The potential near-term catalysts are: 1) the high likelihood that the Public Transport Council (PTC) will grant further fare increase in 2015, 2) lower energy prices which will benefit SMRT more, 3) ridership growth expected to improve, and 4) CDG to benefit from higher growth in taxi rental income as it is the only taxi operator in Singapore allowed to grow its taxi fleet by 1% in 1H15. The longer-term factors are: 1) the announcement of concrete details on the new rail financing model, and 2) the shift of bus operating model to the new bus government contracting model. Note that the impact of the new rail financing framework will have minimal impact on CDG since SBS Transit already does not own any train assets. Under the new bus government contracting model, we expect core bus operations for CDG and SMRT to turn profitable, but CDG is expected to experience more positive impact as it has 75% market share of the bus operations in Singapore.

Maintain OVERWEIGHT
Overall, the expected fare increase along with increasing ridership will continue to drive growth while lower energy prices will further help ease increasing costs pressures. Coupled with the continued efforts put in by the PTOs to manage costs and increase productivity gains, we think the outlook for the PTOs remains positive going into 2015, as we think profitability will improve further. Hence, we maintainOVERWEIGHT on land transport sector, while reiterating BUY rating on both CDG (FV: S$3.03) and SMRT (FV: S$1.70).

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