Amidst expectations of increased pace of reforms, we upgrade Land Transport sector to OVERWEIGHT; we estimate ComfortDelGro and SMRT to receive SGD710m and SGD207m of cash inflow from sale of bus assets. Competitive intensity in taxi business should drop as Uber/GrabCar are brought under regulatory purview. There are reasons supporting the implementation of a new rail financing framework before 2019; LTA could provide clarity on rail reforms as early as 2017.
■ Incorporating benefits from sale of bus assets
As we enter into 2016, we are confident that ComfortDelGro (CD) and SMRT will be able to realise cash from sale of their bus assets to the government before transition of bus operations to government contracting model (GCM), which commences in Sep 2016. We expect the sale of non-Bus Service Enhancement Programme (BSEP) buses at a 10% discount to book value to translate into a cash inflow of SGD710m for CD (FY16) and SGD207m for SMRT (FY17). As we expect the sale to be made at a discount we have adjusted our earnings estimates lower.
■ Competitive intensity in taxi business to drop
We expect the elevated level of competition in taxi industry to fade as Land Transport Authority (LTA) takes constructive steps to bring private car hire apps under regulatory purview. LTA could also look at removing the regulatory bottlenecks that limit taxi operators from competing with Uber/GrabCar. We expect certain pre-conditions to be met before Karhoo app could help taxi operators in providing a formidable response to Uber.
■ Rail reforms likely by 2019
We believe LTA may look at transitioning the North South East West Line (NSEWL) to new rail financing framework (RFF) by end 2018 or early 2019 as
i) SMRT would have completed the capex related to renewal of NSEWL infrastructure by 2018, and
ii) SMRT‟s liability to purchase Circle Line‟s (CCL) operating assets worth SGD1.1bn from LTA in May 2019 may stress its balance sheet.
LTA could also provide clarity on the transition to new RFF before the tender for Thomson-East Coast Line (TEL) in opened up in 2016-17.
■ Upgrading CD to BUY and SMRT to NEUTRAL
We have lowered our WACC assumptions, factored in cash inflow from sale of bus assets at 10% discount, recorded loss on sale of bus assets and lowered our annual taxi fleet growth assumptions for CD and SMRT. Our revised DCF based TPs for CD and SMRT are SGD3.60 and SGD1.60, which offer 20% and 9% upside from current level.
■ Potential for additional upside for SMRT
While rail reforms could be implemented latest by 2019, we have not adjusted our estimates for the same, due to lack of clarity on the nature of licence charges that SMRT might have to pay post transition to new RFF. However, sale of SMRT‟s rail assets to the government at a discount of 10% to in FY19 could add SGD0.50 to our current TP of SGD1.60 for SMRT.
■ Key risks:
i) lower-than-estimated margins for core bus operations under government contract model,
ii) elevated levels of competitive intensity in the taxi industry,
iii) lower-than-estimated ridership for Stage 2 of downtown MRT Line and
iv) rail reforms do not materialise. (Read Report)
Source : RHB Research