SG Transport

SG Transport: Singapore’s Land Transport Authority (LTA) has put up its first package tender to operate public bus services under the new Singapore’s government contracting model. The tender is open to both local and foreign bus operators. The first package will consists of 26 bus routes, and will involve the leasing of 380 buses to the bus operator in 2016, which could grow to 500 buses by 2021. The tender amounts to five years and the operator could be granted an additional two years extension if it performs well. Amongst the three local operators, ComfortDelgro (Comfort) has widely been tipped by investors to be best positioned to benefit from the potential industry changes, given its experience in bidding for and managing route networks for its UK and Australia bus operations. Despite Comfort being expected to bid for the first package, some analysts are guiding that the LTA could try to award the first package to other operators in a bid to encourage competition. Going forward however, Comfort is widely expected to secure a fair share of tenders given its strong track record. Under the asset-light GTC model, the government may acquire the bus assets from Comfort. Assuming this is done at book value, Comfort could derive a cash windfall of ~$675m ($0.32/share), which would give the group added flexibility for M&A growth or dividend distributions. Seperately, taking a leaf out of book from the UK and Australia, the GTC could price the new bus contracts at 8-10% above cost. This could help boost Comfort’s group margin, considering its S’pore bus segment currently generates just 1.6% EBIT margin. Fundamentally, ComfortDelgro is well diversified geographically and across the various transport segments. The stock finds favor amongst investors for its relative earnings stability, steady 3.1% forward yield and potential for M&A-driven growth.