OIR BITES: Land Transport Sector – Progress made on transition to new bus GCM‏


LTA hands Bulim bus depot to new operator
LTA announced last Friday that it has handed over the Bulim bus depot to Tower Transit Singapore (TTS).

TTS is the company that was awarded the first of the three bus packages that were to be tendered out under the new bus government contracting model (GCM), and will operate 26 bus services out of the Bulim bus depot from 2HCY16 onwards.

The early hand-over of Bulim bus depot is to allow TTS to prepare for its operations early. However, buses will only be handed over closer to implementation date.

LTA taking back BSEP buses from SBS Transit
Another significant progress last Friday was that SBS Transit (SBST) also announced last Friday LTA has exercised its rights under the Bus Service Enhancement Programme (BSEP) to transfer all BSEP buses from SBST back to LTA by 31 Dec 15.

BSEP was launched in CY12 to help finance the purchase of additional buses for the bus transport operators in Singapore, in order to meet growing ridership. Under BSEP agreement, the BSEP buses are purchased through a loan facility provided by LTA, which is secured against the BSEP buses. AT the same time, LTA provides monthly financing subsidy to fund the loan repayments.

LTA also has the rights under the terms to transfer legal titles of these BSEP buses to itself at a purchase consideration equal to the outstanding loan granted for the BSEP buses.

We expect these buses to be the ones handed over to TTS for the implementation of the new bus GCM come 2HCY16.

Impact on transport operators in Singapore
Nothing has changed fundamentally for both ComfortDelgro (owns ~75% SBST) and SMRT. The change in the bus operating model to GCM is positive for both public transport operators (PTOs) as they will see core bus operations turn sustainably profitable post transition. Based on the most recent full-year results, both PTOs are still incurring losses on core bus operation, though SMRT’s core bus operations saw slight profit for the last two quarters.

Within the sector, we prefer SMRT (BUY; FV: S$1.70) over CDG (HOLD; FV: S$3.07), especially with the recent slide in SMRT’s share price after the 7 Jul breakdown and weak set of 1QFY16 results.

In our view, the decline in SMRT’s price is overdone and we continue to like SMRT for the longer-term catalyst from the change in rail operating model to the new rail financing framework. Our DDM-derived FV has yet to take into account the potential impact from the rail reform.

Source : OCBC Investment Research

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