Land Transport Sector

Kim Eng on 4 Dec 2012

Pair trade: staging a revival. Our pair trade call since April this year has been doing well, and looks set to stage a revival as the differential of 15% between a Long-ComfortDelGro (CDG), Short-SMRT strategy has been maintained since our last update (Fig 1). Since our call, CDG now counts BlackRock, the world’s largest asset manager, as a new significant shareholder. We urge investors not to miss this opportunity as our Target Prices suggest a further 30% differential still to surface. Reiterate BUY CDG, SELL SMRT.

SMRT bus drivers’ protests a wake-up call. Top of the news recently were reports on SMRT’s mainland-Chinese bus drivers staging a sit-in protest on an alleged pay dispute. While the news itself had more political ramifications than impact to company fundamentals, this wake-up call simply cannot be ignored, as PTOs start to feel the pressure from the Bus Services Enhancement Programme (BSEP) rollout that has exacerbated the scarcity of available bus drivers. This fallout has also resulted in SMRT’s CEO Mr Desmond Kuek recognising ‘deep-seated issues’ that need addressing within the company.

SMRT: overvalued vs peers. While dividend yields are comparable between CDG and SMRT (~4% p.a.), we highlight that SMRT’s valuations look rich on both a forward P/E and P/B basis, which further supports a compelling SELL recommendation for the company. Its forward P/E of ~19x, while comparable to HK-listed MTR, is significantly higher than that of CDG (at ~14x P/E). Its investment case looks similarly unappealing on a P/B basis, where its 3.0x P/B multiple looks significantly inflated versus CDG (1.7x P/B) and MTR (1.3x P/B).

CDG: still our pick. CDG remains our pick of the sector for its diversified land transport business across international borders. Not only does this present steady growth opportunities, it also shields the company from country-specific concerns such as those currently being experienced in Singapore.

Reiterate: BUY CDG, SELL SMRT. Our Long-CDG, Short-SMRT strategy remains intact, premised on our projection of a further 30% differential widening between these two companies. Our target prices for CDG (SGD1.94) and SMRT (SGD1.37) are pegged to 16x and 15x forward PER respectively, with CDG deserving its premium valuation based on its diversified global land transport business.