Singapore Land Transport

Kim Eng on 24 Aug 2012

Pair trade still going strong. Our Long-ComfortDelGro (CDG), Short-SMRT pair trade has reaped plump rewards for investors executing our recommendation since our 5 April report with a 15% differential emerging between both stocks for a period of barely four months. Our call remains valid as we stand by our SELL call for SMRT on operating cost and cashflow concerns crimping dividends. CDG remains our pick in the land transport sector, led by their overseas businesses.

SMRT: Ushering in a new era. SMRT’s new CEO Mr Desmond Kuek (wef 1 Oct 2012), with deep-seated experience in the Singapore Armed Forces (SAF) should be seen as a natural choice for SMRT’s executive hot seat. We think he will mark his era of leadership with a more regimented approach to operations and maintenance, and in the process spare no expense to fill the gaps left by the previous management regime. This reaffirms our expectation that dividends would be further cut from the previous year to manage the weight of an increased maintenance burden on profitability and cashflow.

CDG: Australian buy points the way overseas. Earlier this month, CDG announced the AUD53m acquisition of Deane’s Bus Lines Pty Ltd and Transborder Express which will cement CDG’s position as the largest private bus operator in Australia. Management views Australia’s strong economy and continued population growth as growth drivers for transport services, and we are similarly optimistic about its prospects.

Latest quarter nothing to shout about. There were few surprises in SMRT and CDG’s latest 1QFY3/13 and 2Q2012 results respectively. The common theme was a challenging environment for Singapore based operations, mainly hampered by losses in core bus segments which suffered from higher staff costs. On a more positive note, the taxi businesses were highlights for both companies.

Pick CDG the global leader, SELL SMRT. We see recent events not moving the needle as yet: SMRT’s new CEO will likely take swift action, but his moves will take time to show results, while CDG’s Deane’s acquisition reinforces our expectations of overseas growth. We maintain our preference for CDG based on its global operations’ diversification and growth while SMRT’s business remains largely domestic, and public pressure on maintenance and fare increases continue to pose a drag on profitability. BUY CDG, SELL SMRT.