Singapore Land Transport - Four issues for Minister Khaw

Transport Minister Mr Khaw Boon Wan (Pic Credits : sg.news.yahoo.com)
■ Completing bus transition should be positive. However, benefits are well-flagged. Unlikely to drive stocks.

■ Potential negatives from rail-transition details, more stringent rail-maintenance requirements & evolving taxi market not fully appreciated.

Maintain UNDERWEIGHT & SELL on ComfortDelGro and SMRT.

Four issues for Minister Khaw Mr Khaw Boon Wan was appointed Minister for Transport on 1 Oct.

We have identified four key areas that he would likely address during his term:
1) completing the bus transition;

2) executing rail transition;

3) improving the reliability of the rail network; and

4) addressing new taxi models.

What’s Our View
We believe Mr Khaw’s decisions on these four issues will have a profound impact on the profitability of SMRT (SELL, TP SGD1.10) and ComfortDelGro (SELL, TP SGD2.70). Of the four, we see one positive and three negatives. One positive. If the government completes bus transition with outright asset purchases from the operators, we expect better balance sheets and profitability. However, we believe this has been well-flagged and is unlikely to drive share prices.

Three negatives
Instead, we caution that the Street may not have fully appreciated potential negatives from the other three. The first potential negative is, while a transition to a sustainable assetlight model is positive, contractual obligations under the old regime are often overlooked. We cannot rule out the need to raise funds by SMRT, in order for it to repay its obligations under its old licence. The second is, we expect more pressure on rail profitability from a tightening of maintenance requirements. LTA’s recent call to SMRT to review its maintenance programme could herald higher expenses. Lastly, even though the government could impose more regulations on new taxi entrants, the latter are likely here to stay. We remain UNDERWEIGHT on the sector and reiterate our SELL ratings for ComfortDelGro and SMRT. (Read Report)

Source : Maybank Kim Eng Research

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