Transport

Transport: In what is seen as a game-changer for the local bus industry, the Land Transport Authority (LTA) had announced the restructuring of the public bus industry to a “Government Contracting Model”. Under the model, bus operators will undergo a competitive tendering to operate the bus services, where operators will be paid for their services, while the government will retain all fare revenues. Meanwhile, the government will own all bus infrastructures, lowering the barriers of entry to the market and attract more bus operators. Bus services will be bundled into 12 bus packages with about 300-500 buses each. For a start, LTA will tender out three packages of bus services, starting from 2H14 for the first package, for implementation from 2H16. The contracts will be for five years, and can be extended by another two years. In total, the three packages will comprise about 20% of existing buses. The other nine bus packages (remaining 80%) will continue to be operated by the incumbent operators. LTA will negotiate with the incumbents to run the nine packages under the contracting model, for durations of about five years until their licenses expire on 31 Aug ‘16. After these contracts expire, more bus services will be tendered out. With the transition to a bus contracting model, the government intends to raise bus service levels. All bus services will have waiting time of no more than 15 mins during both the morning and evening peak periods. An estimated 45% of bus services will have shorter intervals during peak periods. Overall, we note that the government’s plan to own all bus assets is a positive development for the operators, as it relieves them of future cash outlay for the purchase of operating assets. Assuming that bus assets worth ~$200m and $900m on SMRT’s and ComfortDelGro’s (CDG) respective balance sheets are sold to the regulator at book value, their debt levels would reduce significantly with the latter transiting to a net cash position of > $1b. Meanwhile, losses at their respective bus segments will also reverse, and an asset-light strategy will similarly see depreciation of assets taken off their balance sheets, all of which could aid in a meaningful earnings uplift. Following the latest announcement, Maybank-KE expects the market to look to the rail transition. If the regulator decides to purchase rail assets on the operator’s balance sheet at book value, SMRT could potentially gain cash infusion of approximately $800m. The house however cautions that transition for the rail business model is far more complicated due to the challenging process of unwinding contractual agreements under the old regime. Going forward, the house believes that the market will look to price the stock of SMRT and CDG using a “sustainable level of earnings”. With the impending transition for their bus units in Singapore, Maybank-KE adjusts its 2016E forecasts to estimate a sustainable level of earnings. Consequently, the house raise its TP for SMRT (Sell: TP $0.80) and CDG (Buy: TP $2.50), based on 15x P/E. With the positive sector development, raise its rating on the sector to Neutral from Underweight.