Singapore Land Transport

Kim Eng  on 5 Apr 2012

Pair trade opportunity. The heat issuing from the massive MRT disruptions last December has hardly dissipated when commuters are again getting hot under the collar over the sheer deluge of tax dollars being deployed to solve a problem created by operators and who now seem to be benefiting from the government’s intervention. From recent sector events, we believe that ComfortDelgro (Buy, TP $1.85) rather than SMRT (Sell, TP $1.41) will be the overall winner and this presents a unique pair trade opportunity to gain from both a 20% upside to ComfortDelgro (long) and 19% downside to SMRT (short).

Hybrid system the best model. Under Budget 2012, the government will set aside $1.1b under the Bus Services Enhancement Programme (BSEP) to fund a significant expansion of bus capacity in response to rail woes. This is the latest intervention in a long series to improve a public transport system that has proven poor in self-regulation. But even before the latest MRT breakdowns and overcrowding that prompted this move, the government’s hand is already obvious in a number of areas, most notably, control of rail capacity expansion and central planning of bus routes. If indeed the government is needed to continually intervene in private sector matters, why not just take it over wholesale? In our view, the hybrid system is perhaps the best model possible under the circumstances.

ComfortDelgro the clear winner. The BSEP and other initiatives are clearly directed at promoting bus ridership. Putting more buses on the road is a quicker fix compared to adding new rail lines. We believe this
move is a boon for ComfortDelgro as the market leader in bus operations. However, an expanded fleet will mean stiff competition for bus captains, and we think that SMRT may get the short end of the stick. There is also the consideration of wage negotiations with labour unions that must be adroitly handled. From a longer-term perspective, one can argue for a consolidation in the public transport market, in which case we think ComfortDelgro would be the preferred operator. But this matter would first require a rethink of the government’s sacred cow policy of having at least two operators in every market.

Buy ComfortDelgro, avoid SMRT. We reiterate our preference for ComfortDelgro over SMRT, and believe that it justifies a higher 16x PER valuation based on recent initiatives to improve bus ridership. Its geographically diverse business also offers greater earnings resiliency and more upside potential versus SMRT’s all-domestic model.