SMRT

SMRT: For some reason, CLSA have detected a renewed interest in Singapore’s domestic public transport market over the past two weeks. This could ultimately be due to any number of factors although house would attribute it to three main events: i) ComfortDelGro testing $2, SATS share price correcting to $3 and premature chatter about the benefits of a cost-plus model. The first word in the FRMC report was “Affordable”; this should give some indication as to the direction of the industry’s profitability. Over the past 5-years OPEX has grown at 10% cagr versus revenue at 5%. A fare revision which allows average fares to grow 10% (to meet OPEX growth) given that population growth is 50% slower is an impossibility in our mind. Margin pressure will continue. There has been significant chatter about Singapore’s buses and then trains moving over to a cost-plus or “hybrid” model. This is an obvious conclusion and also the likely one. House view that it is not coming soon as the focus is now on fare review. The market currently suggests that the concession to operate a loss-making transport system is worth SG$0.80. There is ~30% downside to its $0.89 TP. Although on so many metrics, a fair value of ~$0.50 is equally justifiable. Either way, the market’s pricing of this stock is a long way from reality. SELL.