SG Land Transport

Land Transport: Market is overly optimistic on reforms

Maybank-KE surmises the market is too optimistic on the prospects on local public transport operators, SMRT and ComfortDelGro. Going against consensus, the house maintains its Underweight call on the sector.

Three main reasons underpin the house’s bearishness on the sector. These are:
1) Contractual obligations under the old regime have been overlooked
While an asset light rail model appears attractive, the house notes that a full transition is difficult due to the operators’ obligations under the old regime to purchase rail-operating assets from the government.

If operators are required to repay the cash owed to the government under the old regime, the house notes that SMRT will not have the capacity to do so, and would have to resort to fund-raising.

2) Increased maintenance costs
With rail reliability being a political hot potato as well as the root cause of the major disruption in Jul, the house feels that the government could potentially direct both operators to increase their repair and maintenance spending.

3) New taxi business models to be addressed
The house notes that the government has yet to address industry disruptors, Uber and GrabCar. While the government is likely to place some regulations on these newcomers, the house feels that they will likely be allowed to continue operations as they have helped to ease the shortfall in taxis during peak hours.

This could spell further competition for ComfortDelGro and SMRT, with the former being more affected.

The sole positive for the sector is the completion of the bus reform policy. While the house is generally sanguine on bus operations given the new operating model, it believes the market has already priced in the positive aspects of the transition despite some major details being absent.

These details include the profitability of the nine remaining packages that are to be retained by the two incumbents as well as the way the government will take control of existing bus assets.

With these in mind, the house keeps both ComfortDelGro and SMRT on a Sell rating with TP of $3.02 and $1.35, indicating a potential downside of 11% and 19% respectively.