Singapore Land Transport Sector

UOBKayhian on 22 May 2014

The government plans to overhaul the bus system from 2H16 that will see the government eventually owning all buses and operating asset and deciding on bus routes. According to Land Transport Authority (LTA) the bus fares collected under the new proposal will go to LTA, which will use it to pay the operators. Contracts for the current bus systems will run out at the end-Aug 16. The LTA will bundle bus routes across the island into 12 packages. For a start, LTA will tender out three packages of bus services, starting from 2H14 for the first package, for implementation from 2H16. The contracts will be for five years, and can be extended by another two years on good performance. In total, the three packages will comprise about 20% of existing buses. The other nine bus packages, comprising the remaining 80% of existing buses, will continue to be operated by the incumbent operators. LTA will negotiate with the incumbents to run the nine packages under the contracting model, for durations of about five years when their current bus contract expire on 31 Aug 16. After these negotiated contracts expire, more bus services will be gradually tendered out.

Our view. At this stage, the financial impact cannot be ascertained as details of this new system have not been fully unveiled (such as purchase consideration for the buses, packages, etc). However, our initial take is:

1) This will allow for more competition, particularly from August 2021 when the government opens the tender for the negotiated contracts (which will account for 80% of the existing buses). Hence, the full impact of competition will only be fully felt from 2022 onwards as the open tenders are expected to attract a total of 3-5 bus operators including global player such as Veolia Transport (France), Go Ahead (Britain) and Tower Transit (Australia).

2) Currently the bus routes in Singapore operate under a duopoly system, with Comfort operating 3,326 buses (74% market share) compared with SMRT's 1,140 buses (26% market share). Hence, in the longer term, Comfort could see its market gradually eroded as existing and new competitors join the fray.

3) On the flipside, Comfort will be more familiar under the new system as the group has a presence in Australia and the UK, which are operating under a similar regime. Under a tender regime, we would expect profit margins of 8-10% whereas under the current system, both SBS Transit (Comfort) and SMRT suffered losses of S$14.3m and S$28.3m respectively in their core bus operations for the latest financial year ended.

4) Details of the first tender could be made known by as early as next week but a lot of the financial details are yet to be finalised. Hence, we maintain our earnings and recommendation for the time being pending more information. We continue to prefer Comfort (CD) (BUY) over SMRT (HOLD) given CD's stronger growth outlook and better financials. Despite the possibility of CD losing more market share, this will be a gradual process and competition will only significantly kick in from 2022 onwards. In addition, we expect both CD and SMRT's bus operations to revert back to the black from its current losses.

5) SMRT's share price has rallied 24% ytd vs CD's 14% rise and we think a significant portion of the upside from this restructuring may have been factored in.