• Medium to longer-term catalysts still intact
• SMRT still top pick within sector
• Maintain OVERWEIGHT

Review of 1QCY15 results

ComfortDelGro’s (CDG) 1Q15 results came in largely within expectations continuing its stable growth journey. Its 1Q15 PATMI rose 6.8% YoY to S$67.6m on the back of higher revenue driven by Bus (+2.2%), Rail (+8.1%) and Taxi (+5.2%) segments but eroded by weaker AUD and GBP. SMRT Corp (SMRT) on the other hand, posted a set of disappointing FY15 performance even as PATMI jumped 47% to S$91.0m.

SMRT’s cost recovery momentum seen for the first three quarters of FY15 was marred by higher depreciation from expanding train and bus fleet and higher repair and maintenance (R&M) expenses for the ageing rail system and more scheduled maintenance, which is in-line with the larger train and bus fleet. SMRT’s FY15 revenue growth was mainly driven by higher ridership, average fares and rental income. Nonetheless, the two public transport operators (PTOs) continue to exhibit YoY improvements and are expected to benefit from the ongoing regulatory changes in Singapore’s land transport industry.

Recent development reinforce positive outlook

We are still positive on Singapore’s land transport sector outlook on two key medium to longer-term catalysts: 1) transition to the new bus government contracting model (GCM); and 2) transition to the new rail financing framework (RFF) that will benefit SMRT more than CDG. Looking over the past few months, one key development in the changing landscape of the sector is worthy of mention – LTA awarded the first bus package (Bulim) contract to Tower Transit Group (TTG).

Earlier in Mar 15, LTA released details of the tender for the Bulim contract, of which eight out of the 11 tenders were shortlisted. SMRT and CDG’s (through its 75% owned SBS Transit) tenders were both shortlisted, with SMRT’s bid 25.2% lower than SBS Transit’s bid, which was the second lowest shortlisted bid. Market became concerned that if SMRT had won the tender, it could put downward pressures on the contract fees for the remaining 10 bus packages.

More recently on 8 May, LTA awarded the Bulim contract to TTG at an amount that is 18.7% higher than SMRT’s bid, which provides relief over this concern, especially when the remaining nine packages (~80% of Singapore’s total bus fleet) are to remain with the incumbents, SMRT and CDG, until 2021. We are encouraged seeing good progress on the transition to GCM as well as relief over bus operating margin.

Maintain OVERWEIGHT

In the near-term, we expect both PTOs’ fare business to grow on higher ridership and average fares. CDG is expected to continue its stable growth momentum but note that SMRT is likely to see higher operating expenses in the nearterm on reasons mentioned above but mitigated by higher rental income.

We believe the catalysts driven by regulatory changes will positively change the earnings profile of both PTOs. Hence, we maintain OVERWEIGHT on land transport sector. Given the current share prices, our top pick is still SMRT [BUY; FV: S$1.85] and we think CDG [HOLD; FV: S$3.07] is fairly priced for now.

Source: OCBC Research - 20 May 2015