Land Transport

Maybank Kim Eng Research, May 22

THE Land Transport Authority (LTA) yesterday announced restructuring of the public bus industry to a "government contracting model" which will be phased in starting from H2 2014. The restructuring will raise service standards by increasing competition. Key points under the new regime: 1) competitive tendering, 2) government owns all assets, and 3) each of the 12 packages of routes will be on a five-year contract.

Details of this transition are broadly in-line with our expectations. However, the latest announcement for the government to own all bus assets is a positive development, in our view, as it relieves the operators of future cash outlays for the purchase of operating assets. Assuming that bus assets worth approximately S$200 million and S$850 million on SMRT's and ComfortDelGro's (CDG) respective balance sheets are sold to LTA at book value, their debt levels would improve significantly with the latter ending up with a net cash position of around S$1 billion. Losses at their respective bus segments will also reverse, resulting in a meaningful earnings uplift.

Following this news, the market will now focus on the rail transition. If LTA decides to purchase rail assets at book value, SMRT could receive S$800 million cash. However, as highlighted in an earlier report, transition for the rail business model is far more complicated due to the challenging process of unwinding contractual agreements under the old regime. In particular, the treatment of existing asset purchase obligations in the transition process and future licensing charge are key details that remain lacking. Furthermore, unlike the bus licences, which will expire in 2016, majority of rail lines are contracted under the old regime to beyond 2019.

We believe that the market will look to price both SMRT and CDG based on a "sustainable level of earnings". We use our existing 2016 estimate forecasts as the basis of adjustment to estimate a sustainable level of earnings. Consequently, we raise our target prices for SMRT and CDG to S$0.80 and S$2.50 respectively, based on 15 times PE. Our "sell" rating on SMRT and "buy" rating on CDG remain intact. Given the positive sector development, we raise our rating to "neutral" (from "underweight").

Sector - NEUTRAL