SMRT / Comfort Delgro

SMRT / Comfort Delgro: Deutsche says the land transport sector will likely remain under regulatory scrutiny. Points out, specific policy recommendations in the areas of crisis mgt and maintenance could potentially result in higher repairs & maintenance, and staff costs for operators – these expenses account for ~45% of Comfort’s total opex and ~55% of SMRT’s total costs. But notes, Comfort may be less exposed due to its geographically diversified exposure, whereas near term risks are skewed towards SMRT. Adds, mgt succession remains an uncertainty for SMRT following the departure of its CEO.

Separately, HSBC raises annual repair & maintenance cost estimates for SMRT by $10-13m (1% of overall costs), and cuts FY12-14E profits by 2-5%. Expects SMRT’s margins to take the pressure for having to provide free bus rides during breakdowns, as well as the co maintaining a bigger emergency bus fleet.

Deutsche maintains positive view on the sector, on the back of ridership growth. Keeps SMRT at Buy, but lowers TP to $2. Prefers Comfort (Buy, TP $1.44) for its relative valuation discount and larger total returns offered.
HSBC downgrades to Underweight from neutral, cuts TP to $1.70 from $1.95.