• ComfortDelgro (CD) and SMRT had both top line and bottom line y-o-y growth in the quarter.
• First Bus package has been put up for tender.
• Outcome of Fare Review Exercise: 2.8% fare hike in April 2015.
• Higher Rail and Taxi operating standards to meet.
• Transition to Rail Financing Framework still unresolved.

Recent developments on Singapore Land Transport landscape

• LTA to regulate third-party taxi booking services – Announced on 21 November 2014.
• Marina South Pier MRT station opened – The station was opened by Transport Minister on 22 November 2014.
• Higher Rail operating standards – Media Release by LTA on 15 January 2015.
• Fare review exercise completed – Recommended 2.8% fare increase, effective 5 April 2015.

Quarterly results review for the sector (CD FY14; SMRT 3Q15)

Broad-based revenue growth for CD – Largest contribution from overseas Bus business. Bus and Taxi remain the two largest revenue contributors for CD.

CD has significant exposure to overseas businesses – 48.6% of CD's FY14 EBIT came from overseas businesses (primarily Bus and Taxi businesses).

Broad-based revenue growth for SMRT – Driven by higher ridership and higher average fare for MRT and Bus, and higher taxi rental income. Higher Rental revenue (30% y-o-y growth) was due mainly to higher rental rates of commercial spaces and rental revenue from the Kallang Wave mall.

Improved profitability for SMRT – Largely driven by the reduction in losses from Bus business; MRT EBIT margin remains razor thin at 2.0% for the quarter. Rental business continues to be the main contributor to SMRT's Group operating profit.

SMRT still bleeding cash and net gearing is rising – SMRT is generating a negative free cash flow and had to raise debt to support Capex requirements.

Outlook for the sector

Lower 2015 fare increase of 2.8% compared to 3.2% in 2014 – Revenue growth attributable to fare increase to be lower, but underpinned by higher ridership.

Rail: Expect higher operating costs, to comply with Regulatory standards – LTA has announced implementation of higher Rail standards.

Implementation of first Bus Package could be as early as May 2016 – SMRT expects the implementation to take place in May 2016. The remaining bus packages retained by the incumbents are widely believed to transition in September 2016.

Lower fuel prices – PTOs to see some reduction in operation costs, but effect could be moot, as lower fuel prices are incorporated in the fare revision formula.

Higher Taxi Availability standards – 85% of taxi fleet required to be on the road during peak periods (up from previous 80%).

Free cash flow for SMRT to improve – As the domestic Rail network transitions to RFF. However, key question on when it will happen remains.

Investment Actions

CD downgraded (from "Accumulate") to "Reduce" (TP: $2.97) – Recommended to take profit, as we believed that positives for CD had been priced in.

SMRT maintained at "Reduce" (TP: $1.54) – The Group is profitable, but balance sheet and cash flow remains weak.

Source: Phillip Securities Research - 10 Mar 2015