Singapore Land Transportation - Fare Hike Within Expectation. 17-Jan-14 The Public Transport Council’s announcement of a 3.2% fare increase for both trains and buses this year is in line with our expectation. We remain downbeat on local operating conditions and see no near-term catalysts that could spark a rerating of the sector. We still prefer CD over SMRT for the counter’s cheaper valuations and overseas exposure. 3.2% hike within expectation. The Public Transport Council (PTC) of Singapore announced that it has approved a 3.2% increment in both train and bus fares, to be implemented from 6 April onwards. Although its fare review justified a 6.6% increase, PTC hiked up fares by only 3.2% this year and opted to leave the remaining 3.4% for review in 2015. Limited positive impact on operators. The actual net positive impact of the hike on operators is limited by the requirement to set aside a Public Transport Fund (PTF) to support needy commuters. PTC requires SBS Transit (75%-owned by ComfortDelgro (CD SP, BUY, TP: SGD2.25)) and SMRT Corp (SMRT SP, SELL, TP: SGD1.11) to allocate 20% and 25% of their respective incremental revenue to the PTF. As such, the net gains in CD and SMRT’s revenue arising from the fare hike are estimated at SGD28.8m and SGD13.2m annually. Local operating conditions remain unfavourable. While revenue growth will be constrained by slowing population growth and the limited fair hike, operating costs are escalating in tandem with: i) the companies’ commitment to deliver enhanced service quality, ii) higher energy prices, and iii) a shortage of domestic labour. As such, a meaningful turnaround would only occur should the underlying business framework change (eg cost-plus model). As any change in the framework is subject to lengthy government deliberations, we do not expect much to happen anytime soon. Hence, the local operating environment is expected to remain sluggish. We prefer CD’s its cheaper valuation and overseas exposure. We are NEUTRAL on the land transportation sector due to the challenging operating conditions in Singapore. Our models previously factored in an expected c. 2.5% increase in fares this year (close to the 3.2% hike, excluding PTF). Between SMRT and CD, the formers recent financial results fared worse due to its 100% Singapore exposure as well as the sharp revision in the companys wages. We continue to favour CD for its overseas operations and attractive valuation. At an FY14 P/E of 14.5x and with a 3.7% yield, CD is more attractive than SMRT, which is trading at a 23.8x FY15 P/E and offers a 1.9% FY15 yield (FYE March).
Posted on: Sun, 19 Jan 2014 23:46:40 +0000
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