Download - Singapore Industry Focus Singapore Land Transport - DBS Industry Focus Singapore Land Transport Page 4 Rail • Not expecting changes to rail framework so soon • New model should

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ed-JS / sa- YM

Hoping for too much, too early

• Changes in rail framework some years down; we believe this will take place only in 2019

• Positive changes in bus model is priced in

• Market overzealous in our view; limited upside given stellar price performances from CD and SMRT

• Downgrade CD to HOLD on limited upside; maintain HOLD call on SMRT. CD remains our preferred pick, but at a lower entry price

Rail: Market overzealous on reform timing/details. We believe investors have been overly enthusiastic on the timing and the potential benefits accruing to SMRT from the new Rail Financing Model (RFM). The Transport Minister recently stated in Parliament that a “wide gap” remains between SMRT’s expectations and LTA’s stand. We expect implementation to still be some time away, and likely to take place only in 2019. Except for the benefit of relieving SMRT from huge capex requirements, it remains unclear if the new framework will be accretive to SMRT’s bottomline. Assuming the rail assets are transferred back to LTA at net book value (c.S$1.1bn), we estimate SMRT to turn into a net cash company in c.2019. However, this is not before an estimated S$900m in capex commitments on the North-South-East-West Line (NSEWL) is spent from 2014-19.

Bus: Positive changes priced in. With the recent increase in share prices for both CD and SMRT, we believe the positive impact from the impending changes expected from 2H2016 is largely priced in. Based on our assumptions, we estimate that the market is attributing 12x – 25x PE for both SMRT and SBSTransit’s bus operations under the new contracting model. While this may not seem excessive, we highlight that this change will only take place 2 years later, and the contract period for bus tenders is for 5+2 years.

Neutral on sector, prefer CD at lower price. We now adopt a neutral view on both stocks as the market seems to have priced in the positives. We still like CD for its geographical diversification, consistent track record but valuations are now at 1.5 std deviation above historical average. We downgrade CD to HOLD (TP raised to S$2.70), and prefer to accumulate the shares at c.S$2.30-2.40. We maintain HOLD on SMRT (TP: S$1.60) on the back of stretched valuations of 32x/26x FY15F/16F PE, projected increase in debt/equity ratio to 0.9x by FY16F and a near term resolution to rail reforms that the market had been hoping for.

STI : 3,356.08

Analyst Andy SIM CFA +65 6682 3718 [email protected]

STOCKS

Source: DBS Bank ComfortDelgro : Major operator of taxi, bus and rail passenger transport services.

SMRT : Primarily involved in operating the main MRT line in Singapore.

YTD Share price performances

$0.75

$0.85

$0.95

$1.05

$1.15

$1.25

$1.35

$1.45

$1.55

$1.65

$1.75

$1.50

$1.70

$1.90

$2.10

$2.30

$2.50

$2.70

Jan/14 Feb/14 Mar/14 Apr/14 May/14 Jun/14 Jul/14

ComfortDelGro [LHS] SMRT [RHS]

S $/share S $/share

Source: ThomsonReuters, DBS Bank

DBS Group Research . Equity 30 Jul 2014

Singapore Industry Focus

Singapore Land Transport

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 3 mth 12 mth Rating

ComfortDelgro 2.58 4,437 2.70 21.7 29.3 HOLD SMRT 1.575 1,930 1.60 26.0 9.0 HOLD

Industry Focus


Investment Summary

Sudden shift in gears from a “stable ride” to “high octane chase”. In a contrasting turn of fortunes, investors’ interest in public transport counters has burst to life since late Apr with share price movements shifting into high gear. After evaluating details and developments in detail, we believe the market is overly optimistic on further share price gains on both CD and SMRT, at least in the near term. We have been optimistic on CD, but with the 30% surge in share price in the last 3 months, we downgrade CD to HOLD, TP: S$2.70 and advise investors to hold ground at this stage. Whilst we still like the company’s fundamentals, we would prefer to accumulate at lower levels at c.S$2.30 – 2.40 (10-15% upside to TP). We maintain our neutral stance on SMRT [HOLD, TP: S$1.60], albeit with a higher TP. Rail: Investors could be overly zealous on timing of rail reforms. We believe investors are overly zealous on the timing and details of the expected new Rail Financing Model (RFM). Yes, we expect changes to the rail operating model to come, but only 4-5 years later – this seems like an eternity for the majority of equity investors. The market seems to have high expectations on SMRT, based on the backdrop of the 54% surge in share price since late Apr, putting valuations at stretched levels of 32x/26x FY15F/16F. We also expect capex requirements to remain high and project D/E to increase progressively to 0.9x by FY16F, before tapering down thereafter. Why we think it won’t happen soon? Our views are premised on the following: (i) recent statement by Transport Minister that a “wide gap” remains between “SMRT’s expectations and Land Transport Authority (LTA)’s position”, implying there are many areas still to be ironed out; (ii) LTA’s near term focus is on the proper implementation of bus contracting model; (iii) rail operations, if we include ancillary revenues such as rental and advertising, remains rather profitable; (iv) bottlenecks lie with network to increase frequencies particularly during peak hours, and not financial capability. Unclear if new framework will be accretive to SMRT’s bottomline, after considering licence charge. There are currently no public details disclosed on SMRT’s proposal for the new RFM. A positive for SMRT, in our view, will be an asset-light model, relieving it of capex and thus financing requirements. We project SMRT has the ability to pay out 18 – 25 Scts cash distribution to shareholders, in the event of a transfer of rail assets to LTA, but this is likely to be only in 2019. Besides this, we do not expect any significant additional benefits to SMRT’s bottomline as the absence of depreciation expenses (from an asset-light model) is likely to be replaced by

a licence charge by LTA. We believe this will be similar to that used for DTL. Bus: Recent share price movements could already have priced in changes to come. We have a positive view on the announced changes to Singapore’s bus operations. Share prices of CD and SMRT have both appreciated by c.12% since the announcement on 21 May 2014, and more if we take reference from a week before that. We believe this has largely priced in the positive impact from impending changes come 2H2016. Market value increase suggests PE of 12x – 25x for bus contracting operations. Based on our assumptions and the increase in market values of CD and SMRT, we estimate that the market is attributing 12-25x PE for both SMRT and SBSTransit’s bus operations, under the new contracting model post 2H2016. While the estimated valuation in itself does not seem excessive, we have to note that the change will take place only in 2 years’ time, and the contract period is for 5+2 years. We also believe margins are likely to be in the lower range of our assumption (5% to 10%) and below compared to similar bus operations in the UK or Australia, given that Singapore’s bus contracting model will be asset-light, ie LTA will own the assets. Stocks Neutral view given strong share price performances since 2Q. In view of the strong share price performances since Apr from recent announcements on changes to the public transport scene, we now adopt a neutral view on both land transport stocks under coverage. We believe the market has priced in the positives on impending changes and could be too optimistic on the timeframe, particularly the new RFM. ComfortDelGro: Downgrade to HOLD, TP: S$2.70. We have been recommending CD in the past given our liking for its geographical diversification, consistent track record and below historical average valuations (<15x). Whilst we still like the company, its recent share price performance has regrettably made valuations (+1.5 std dev) less attractive. We acknowledge that this could be on the back of the better outlook for its Singapore public bus operations, but we felt that this may already have been priced in since the announcements in May. CD’s share price has risen by 15% since then. We will prefer to accumulate at a lower price of c.$2.30 – 2.40, which would then offer 10% - 15% upside to our revised TP of S$2.70. SMRT: Maintain HOLD, TP revised to S$1.60. No doubt SMRT will see earnings turn up from FY15, but valuations are expensive, at 33x/26x FY15/16F with its share price up c.59%

Industry Focus


from recent lows. Unless one holds a long term view (ie >3 years) and is very sure of the outcome of the new RFM. We project SMRT’s capex requirements to remain high, which will push its net debt/equity to 0.9x till FY16F, before tapering off. If our projections are right, we could only see the asset-light model come into play in 2019, and avail 18-25Scts cash distribution to shareholders. We are not ready to take a bet on this given the dearth of details and our view that implementation will only be seen in 2018/19. Maintain HOLD, S$1.60 TP, as valuations already reflect positive changes. Despite high valuations, we believe market expectations on rail reforms will continue to support SMRT’s share price.

Risks to our views. Key risks to our views are: (i) earlier than expected resolution and implementation of the rail reforms; (ii) better/lower than expected margins for bus operations under the new contracting model; (iii) limited competition post implementation of the bus contracting model.

Peer valuation table

* FY15E & 16F, EPS CAGR 14-16 Source: DBS Bank

Shr Mkt Mkt Price T arget Div Y ield EPS CA GR

Cap Cap Cap (S$) Price % (%)

Company F YE (m) (S$m) (US$m) 25- J ul (S$) Upside Rcmd 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F 14F 13-15

Land T ransport

ComfortDelgro Dec 2,135 5,509 4,437 S$ 2.58 2.70 4% Hold 12.9 13.5 20.0x 19.1x 2.4x 2.3x 7.5x 7.0x 12% 12% 2.9% 4.1

SMRT* Mar 1,522 2,396 1,930 S$ 1.575 1.60 2% Hold 4.9 6.1 32.3x 25.9x 2.8x 2.7x 11.0x 10.0x 9% 11% 1.7% 22.3

(x ) (%)

EV /EBITDAP/BVPEEPS

(%)

ROA E

(x)(Sct s) (x )

Industry Focus


Rail • Not expecting changes to rail framework so soon • New model should ease capex burden for SMRT, but will

see increase in licence charges • SMRT has capacity to distribute c.18-25 Scts/share but

only in 2019, in our opinion • Market seems overly elated; SMRT valuations very rich at

32x/26x FY15F/16F PE; Maintain HOLD

Background Singapore’s MRT system started in 1987 with the North-South Line. There are currently 5 MRT lines in operation, with a total of 150km of rail network. The Singapore government is focusing on building up the rail infrastructure within the next decade and a half. By 2030, the total rail network is expected to grow to 360km with the addition of 4 more new lines (namely Thomson Line [TSL], Eastern Region Line [ERL], Cross Island Line [CIL] and Jurong Region Line [JRL]) and a couple of extensions to existing lines.

Map of existing rail lines (black), upcoming lines announced in LTMP 2008 (blue) and LTMP 2013 (red dashes)

Source: LTA

Industry Focus


Current and future details of MRT network in Singapore (including rail lines in 2008 & 2013 Land Transport Masterplan)

Rapid Transit System Route Length (km)

No. of stations

Operator Remarks

North-South Line (NSL) 44.0 25 SMRT 13 more trains from 2014 to support Tuas extension, and 22 more from 2016. Increasing capacity by about 50%.

Upgrading of re-signalling works for completion by 2016 to improve trains to run at intervals of 100 secs, down from 120

secs. East-West Line (EWL) 49.2 35 SMRT North-East Line (NEL) 20.0 16 SBSTransit Addition of 18 more trains progressively from 2015; this will

increase capacity by up to 70%

Circle Line (CCL) 33.0 28 SMRT Fully opened in 2012 Downtown Line Stage 1 (DTL1)

4.3 6 SBSTransit Bugis to Marina Bay, Chinatown

150.5 110

Future lines Announced in LTMP2008 NSL extension 1.0 1 SMRT By 2014. Extension into Marina Bay Cruise Centre

DTL2 16.6 12 SBSTransit Originally to be completed in 2015, delayed to 2016. Bukit Panjang to Bugis area

Tuas extension 7.5 4 SMRT By 2016. Expect to carry 100k commuters daily when completed

DTL3 21.0 16 SBSTransit In 2017. Chinatown to Eastern part of Singapore

Thomson Line (TSL) 30.0 22 na First stretch to open (Woodlands) from 2019. Second stretch, 6 stations in 2020, final stretch of 13 stations by 2021. Expect to

be fully completed in 2021.

Eastern Region Line (ESL) 21.0 12 na Original completion by 2020. Possibly some delay with TSL completion only in 2021.

Rapid Transit System (SGP-JB)

na na By 2018

97.1 67.0

Announced in 2013 Cross Island Line (CIL) 50.0 na By 2030. Connect Changi Airport to Pasir Ris, Punggol,

Hougang, Bukit Timah to Jurong

Jurong Region Line (JRL) 20.0 By 2025. Network around Jurong, Tengah, Choa Chu Kang area.

Circle Line Stage 6 (CCL6)

4.0 By 2025. Closing loop between HarbourFront and Marina Bay.

Downtown Line Extension (DTL Ex)

2.0 By 2025. Connecting EWL and ERL.

North-East Line extension (NEL ex)

2.0 By 2030. Extending from Punggol to Punggol North.

78.0

Total MRT (ex LRT) 325.6 LRT 28.8

Total Rail 354.4

Source: LTA, DBS Bank

Industry Focus


Current operations. Currently, the MRT lines are operated by two incumbent operators (namely SMRT and SBSTransit) and dictated by the Licence Operating Agreement (LOA) as defined by SMRT or Licence Condition (LC) as defined by SBSTransit. There are two operating models for the rail network, namely the fare revenue model and new rail financing framework. Under the original framework, the licence term is longer at around 30-40 years. It is one whereby the operator will

purchase the operating assets from LTA after an initial period, usually 10 years. The operator will pay LTA a nominal annual licence fee, estimated at c.1% of fare revenue. The operator will then be responsible for the repair and maintenance of the operating assets and infrastructure. Currently, 4 MRT lines (NSL, EWL, NEL and CCL) are operating under this model. However, amongst these, only the operating assets of NSEWL (North-South-East-West Line) (which first began operations since 1987) have been taken over by the operator (ie SMRT).

Summary of MRT’s operating model

Current New Rail Financing Model/ Framework

Comments

Rail lines North-South Line (NSL) East-West Line (EWL) North-East Line (NEL) Circle Line (CCL)

Downtown Line (DTL)

Model Operator will take over operating assets after initial period.

LTA will own all assets, and oversee capex.

Operating assets Owned and maintained by operator after certain period

Owned by LTA, maintained by operator

Operator asset light model, reduces capex

Fixed assets Owned by LTA, maintained by operator

Owned by LTA, maintained by operator

Fare Fare revenue model Fare revenue model No change

Licence fee/ charge Used to be % of fare revenue, estimated to be c.1-2%. Revised to an annual amount, but estimated to still equate to c.1% of fare revenue

Fixed and variable component of unknown calculation for licence charge. DTL estimated to be S$1.6bn over 19 yr licence period.

Expected to be higher for new model given asset light framework

Tenure 30 years; 10+30 yrs (CCL) Shorten to about 15 years. DTL is for 19 years, to take into account the phased opening of the different stages.

Source: DBS Bank, LTA New Rail Financing Model (RFM): what is it? The New Rail Financing Model is a relatively new framework which was put in place in 2010 following the amendment of the Rapid Transit Systems Act, and implemented on the DTL. Under this, the LTA assumes ownership control of operating assets (eg rolling stocks, non-proprietary systems and assets), and in turn, the operators pay a licence charge for the use of the operating assets. Essentially, the key difference between this and the previous model is that the operator will be obligated to purchase the operating assets from LTA.

A point to note is that the licence charge is different from the licence fee that operators are currently paying under the original framework. The licence charge will comprise a fixed and a variable component. For DTL, the total licence charge was estimated at S$1.6bn over the 19 year term of the licence, as indicated by LTA in a press release during the award of the contract back in 2012. This framework will allow the Government to ensure timely injection of additional capacities when demand is projected to increase. In addition, this also allows greater contestability in the sector, which the authorities believe will spur greater efficiencies and increase productivity.

Industry Focus


Details of existing MRT lines in operation North-South-East-West

Line Circle Line North-East Line Downtown Line

NSEWL CCL NEL DTL

Definition of agreement

License and Operating Agreement (LOA)

License and Operating Agreement (LOA)

Licence Condition Licence Condition

Initial Licence term 30 years 10 + 30 year 30 years 19 years

From 1 April, 1998 4 May, 2009 15 January, 2003 20 December, 2013

Expiry year of initial term

2028 2019/ 2049 2033 2032

Remaining expiry of initial term (years)

14 5 19 18

Extension Further 30 years or any period to be determined

30 years Further 30 years or any period to be determined

not determined

Licence fee Annual nominal fee, estimated at 1% of fare and non-fare revenue

Annual nominal fee, estimated at 1% of fare and non-fare revenue

Estimated 1% of fare and non-fare revenue; was 0.5% of total annual fare and non-fare revenue for first 10 years.

A licence fee is payable to LTA

Licence charge not applicable not applicable not applicable Fixed and Revenue share charge; Fixed payable from FY2019 but computation unknown. LTA projected a total licensing fee of S$1.6bn over 19 years.

Operating assets ownership

SMRT. Assets were purchased from LTA on 1 April 1998 for S$1.2bn.

LTA, currently. SMRT to purchase operating assets from LTA at book values on 4 May 2019.

LTA, currently. SBSTransit to purchase operating assets on a date to be determined after review

Not applicable

Latest update SMRT has submitted proposal to LTA for a sustainable rail framework which is asset light in nature.

LTA indicated that SMRT has to buy over the first set of operating assets in 2019 at an est. net book value of S$1.1bn.

The review for the transfer of operating assets has yet to commence

Stage 2 and Stage 3 due to open in 2016 and 2017, respectively.

Source: LTA, Company reports, Media reports, DBS Bank

Industry Focus


Market overly elated, expectations of changes on rail too premature, in our view Optimism in a transition to Rail Financing Model? SMRT submitted a proposal in early April (according to SMRT’s management in its FY14 results briefing) for a sustainable rail operating and financing framework. Specifics and details of the proposal were not disclosed, but we believe it would have included plans for an asset light model, transfer of back assets to LTA (for NSEWL), operating licence charge, service standards, etc. “Wide gap” exists… - Transport Minister on Rail Financing Model. There has been much speculation as to the timing and eventual outcome to SMRT’s proposal. In a parliamentary response on 7 July, Transport Minister, Mr Lui Tuck Yew, indicated that there “remains a wide gap between SMRT’s expectations and LTA’s position” on the Rail Financing Model. In fact, in his address to shareholders during the company’s recent AGM, SMRT’s CEO Mr Desmond Kuek indicated that “there remain a number of important issues that need to be converged on”. Too early to expect a clear resolution and transition to the new RFM. There remains much speculation from Mr Lui’s statement. We believe the market may be expecting too much and is too optimistic on the outcome given SMRT’s recent share price performance. SMRT’s share is up a whopping 53% since hitting a low of S$1.02 in early April. The basis for our views are as follows: 1. A clear resolution still some time away. As mentioned

above, there are still numerous details to be ironed out, with respect to the computation of finance charge (for use of the operating assets), transfer of operating assets (at what price), commitments to repair and maintenance, future capex, and so on.

2. Implementation will be even further away, to 2018/19. We believe the recent Bus Government Contracting Model (GCM) will be implemented only in 2H2016, and the authorities would like to ensure that the transition will be seamless. Our belief is that once the transition has been done for the buses - which start from 2H2016 and will likely progress into early 2017 - only then will the focus turn on changes to the rail model. Our view is 2018/19 as the timeline, which is also premised on the expiry of CCL’s initial 10-year term (since 2009), where SMRT will be obliged to acquire the operating assets from the LTA.

3. Rail, in its entirety, is still profitable. There is no doubt that profitability has slumped for MRT particularly since FY12, arising from higher staff costs, repair and maintenance and capped fare increases. But, the weak

contributions from its fare revenue were partially mitigated by non-fare revenue, particularly rental and advertising. We note that a significant portion of rental income is derived from retail space within the MRT stations.

4. Bottlenecks in rail are from fixed infrastructure. Overall ridership for the l MRT has increased over the years. Unlike buses, where services can be increased with more buses, the bottleneck for MRT is largely constrained by fixed infrastructure, ie signalling system (or headways between train intervals) and network. Hence, even if we assume the New RFM is implemented within this year, there would still be constraints on increasing frequencies.

Too early to say new RFM will be positive for SMRT. It is difficult to assess the potential impact on SMRT given the dearth of details, except for our view that an asset light model (similar to DTL) is highly likely. Without concrete details on how it will be structured, we have reservations that a new RFM will be grossly accretive to SMRT, after taking into account contributions from retail rental and advertising income. As seen in the chart on the next page, EBIT from rental and advertising has been steadily increasing over the years, and has surpassed MRT’s EBIT. Without taking away credit from SMRT’s management for its success in building up and investing in non-fare revenue streams through rental and advertising, SMRT is currently paying a nominal fee for the rights to these revenue/profit streams. From our perspective, while rail operations (fare revenue portion) seem financially unsustainable, this segment is being subsidized by rental and advertising, thus supporting overall profitability for SMRT trains. Licence charge has to be taken into account in an asset-light model. In our view, assuming an actual transfer of NSEWL rail assets back to LTA, we believe there will be a corresponding licence charge that will have to be paid by the operator (ie. SMRT in this case) to LTA. This will be compensation for use of operating assets for the remaining term of the operating lease. Expect no major upside to our DCF backed valuation methodology. The licence charge, in our opinion, is likely to be over and above the prevailing depreciation of the rail assets, which will likely be in the region of S$110-120m/year. In such a scenario, there will be no major changes to our DCF-backed valuation and our TP.

Industry Focus


SMRT’s rental and advertising EBIT is mitigating fall in rail EBIT

Source: Company, DBS Bank Changes will be positive due to lower capex requirements; expect net book value of c.S$1.1bn by 2019. The benefit from an asset-light model is that it will be less demanding on the balance sheet, as there is no need to finance the hefty capex. LTA indicated that SMRT has about S$2bn in financial commitments over the next 5 years to take over operating assets and for re-signalling works. We estimate that only S$900m will be required for NSEWL, and the S$1.1bn indicated for CCL is unlikely to happen. Assuming operating assets are transferred back to LTA, we estimate that the net book value of SMRT’s rail assets will be c.$1.15bn in 2019. Our assumption is premised on:

1. Additional capex of an average of S$180m/year up till 2019 for NSEWL and related assets (totalling c.S$900m). This is likely to be front-end loaded, with majority of the capex spent from FY15F to FY17F.

2. Depreciation of c.S$110m/year 3. Current NBV of rail assets estimated at c.S$800m as

of end Mar’14. 4. Circle Line assets stay with LTA in view of the new

RFM.

Areas of financial commitments to 2019 Amount

NSEWL – additional trains, re-sleepering, re-

signalling works, etc

$900m

BPLRT operating assets $40m

CCL – operating assets including trains, stations $1,100m

Total $2,040m

Source: LTA, media reports, DBS Bank

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

MRT EBIT (S$m) Rental & Advertising EBIT (S$m)

Despite falling rail EBIT, rental and advertising profits derived largely from rental within rail infrastructure are on the rise and retaining overall profitability for SMRT

EBIT (S$m)

Industry Focus


DBS’ estimate of SMRT’s net book value of NSEWL rail assets in 2018/19

S$m Remarks

FY14 - Current estimate rail assets net book

value

S$800m DBS estimates as of end FY14; includes rolling stocks, signalling systems,

power systems, infrastructure, etc

Capex S$900m Estimated commitments for additional trains, upgrade of signalling systems,

resleepering, etc.

Depreciation from FY15-19F. S$550m Estimated based on average of S$110m per year on total rail asset

FY19 - Rail assets NBV S$1,150m

Source: DBS Bank estimates, media reports

Projected SMRT’s net debt & net debt/equity (inverse) – Net debt/Equity to increase until FY16F before tapering off

Source: DBS Bank’s estimates, Company SMRT’s net deb/equity ratio to increase. We project SMRT to continue with its capex requirements particularly on rail, which will see its net debt/equity increase progressively from 0.6x in FY14 to 0.9x in FY16F. Thereafter, we project D/E to taper off on lower capex requirements. And assuming our expectations play out in terms of the rail assets transfer, SMRT could see a reversal of its debt position into net cash once again.

Potential18Scts – 25Scts per share available for distribution, but only beyond 2019. Based on our scenario assumptions and modelling, and assuming the transfer of rail assets takes place in 2019, we estimate SMRT will turn net cash with c.S$530m from net debt. Assuming retention of c.S$150-250m to pursue growth opportunities, there could be c.S$0.18 to 0.25/share available for distribution. This seems attractive, but we have to highlight that this is a potential in the distant future, ie beyond 2019, in our opinion. The bottomline? Yes, potential cash bonanza, but its 5 years away.

(1.00)

(0.80)

(0.60)

(0.40)

(0.20)

0.00

0.20

0.40

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F post RFM

Net cash/ (debt) (S$m) Net debt/equity (inverse) (x)

S$m (x)

Project D/E to increase up to FY16F

on capex requirements, before

progressively declining from

FY17F.

Industry Focus


Bus: Positive changes priced in • Changes to bus operating model is positive as previously

indicated • Positive effects of changes in bus ops reflected in strong

share price performance • Estimate the market is valuing bus ops at 12-25x for a

5+2yr lease business

Share price up post announcement on Government Contracting Model for Buses. Both public schedule bus operators saw positive reactions to their share prices since the announcement on the bus reforms on 21 May 2014. Market cap increased by c.12% for both, translating into an increase of c.S$550m and S$260m for CD and SMRT, respectively. In fact, since 23 Apr (a day before SMRT’s “unexplained” price surge), CD and SMRT share prices have surged by 26% and 57%, respectively. Share price (S$) of CD [LHS] & SMRT [RHS] YTD

Source: ThomsonReuters Positive development but priced in Positive move for operators from 2H2016. As mentioned in our earlier report (“Positive transition for operators”, dated 22 May 2014), we saw this as positive for both SMRT and SBSTransit (subsidiary of ComfortDelGro). To recap, firstly, the new model will erase operating losses that both operators are experiencing, which stood at S$9.2m in the latest quarter. We project losses are bottoming out, and will progressively decrease to c.S$19m by 2016 with the recent approved fare increases.

Secondly, LTA taking on the operating assets will free up capital expenditure requirements for both SMRT and SBST, and would allow resources to be deployed in other areas and/or payment of dividends. As of the latest available annual reports, we estimate the net book value of buses under SBST and SMRT were S$747m and S$159m (excluding BSEP buses), respectively. At this stage, there is limited information with respect to tender outcome and margins, etc. Based on our initial estimates and assumptions, we project that CD and SMRT should see an uplift in earnings from bus operations from 2H2016. Assuming a normalized margin of 5%, we estimate CD and SMRT to register EBIT of $25m and S$8m, respectively (from projected losses of S$4.5m and $14.4m in their preceding FY), accounting for c.5% of the projected Group profits by then. Whilst this is lower than the margins we observed in UK and Australia, we must bear in mind that operations in those countries involve the operators owning the assets and buses. Under the new Government Contracting Model (GCM) in Singapore, the authorities (ie LTA) will own the assets. Competition to increase, though incumbents likely to have an advantage. With the tendering process and assets owned by the Government, this is likely to ease barriers to entry and make it attractive for new players. Over the long term, we expect to see a more fragmented market than the current operating environment. That said, we believe the incumbents would still likely retain a major market share up till 2021/22 given that 9 packages are still on negotiated contract basis, and local knowledge. Are the positives priced in? We looked at the increase in market cap. Taking reference from 15 May - about 1 week before the actual announcement - market values of both SMRT and CD have increased collectively by c.S$1.05bn or c.15%. Share price increase suggests 12x-25x PE for bus contracting operations. Based on an increase of S$1bn in market cap and assuming this was attributed to the resultant positive impact from the changes in the bus contracting model, we estimate that the market is attributing 12x to 25x PE on bus operations after 2H2016.

$0.75

$0.85

$0.95

$1.05

$1.15

$1.25

$1.35

$1.45

$1.55

$1.65

$1.75

$1.50

$1.70

$1.90

$2.10

$2.30

$2.50

$2.70


ComfortDelGro [LHS] SMRT [RHS]

S $/share S$/share

Industry Focus


To derive this, we had subtracted the estimated net book value of both operators’ buses from the increase in market value, and derived a residual market value – we figured this should imply the “price” of bus operations of both SMRT/CD post 2H2016. Our profit projections are based on assumptions of 5% to 10% operating margins.

We believe the market has already priced in the positive impact. While the PE multiples do not seem excessive, we have to note that this change is only coming in from 2H2016, with the contract period set at 5+2 years, and our view that margins are likely to be within the lower range of our estimates given that this is an asset-light model.

Positive bus contracts priced in; market valuing bus ops at 12x - 25x PE (DBS estimates)

S$ m Remarks

Mkt cap increase (1) 1,053 Derived from price increase of both CD and SMRT (from 15 May’14) NBV of bus assets (2) 531 Assumed NBV of bus in 2H2016, discount to present value at est. 5%

WACC; accounted for CD's 75% ownership of SBST, and less BSEP buses

Implied value of bus operations (3) = (1) - (2)

522 Assumed implied market value of the bus operations under the Government Contracting Model

Assumed margins of bus contracting model

Assumed net profit for 2017

(S$m)*

PE (x) Remarks

5% 21.2 24.6 Implied PE of between 12-25x depending on the margins from the bus contracting model, which suggests that positive price movements may have already priced in this change that will only come in 2H2016

8% 34.0 15.4 10% 42.5 12.3

Source: DBS Bank estimates

Are we 100% sure of our assumptions? Well, of course not. However, we believe this to be best of our knowledge and analysis so far. To be fair, we believe the industry does not have exact figures or any historical data. Background of Government Contracting Model for Buses A new framework. The LTA announced in May 2014 that it is restructuring the public bus industry to a contracting model from 2H2014. The rationale is to make public buses more responsive to changes in ridership and commuter needs. Implementation of the proposed changes will begin progressively from 2H2016. Under the new model, LTA will determine the bus services and standards to be provided. The operator will bid for the right to operate the services and will be paid a fee. Fare revenues will be retained by the Government, unlike the current model where the operator earns its returns via fare revenue and incurs capital and operating expenses. Assets owned by Government. Under the new model, all the operating assets and infrastructure will be owned by the Government. These include bus depots, buses and fleet management system. The rationale is to lower entry barriers, attract more operators and facilitate transfer to new operators should an incumbent not win the tender on contract expiry.

Bus segregated into 12 packages; 3 packages to be tendered, implementation from 2H2016. Bus services will be bundled into 12 packages, with about 300-500 buses under each. LTA will start the competitive tendering process for 3 packages from 2H2014 and implementation from 2H2016. The remaining 9 packages will continue to be run by the incumbents on a negotiated model for about 5 years from 31 Aug 2016. The negotiated contracts will be gradually tendered out after the contracts expire. First tender to include 24 bus services and one depot. The LTA has since announced details of the first tender, which will include 24 bus services (16 from SBST, 8 from SMRT) and these will operate out of the new Bulim depot. It is estimated that there will be a total of 380 buses in 2016, and progressively growing to about 500 buses by 2021. A 5+2 year contract term. The term of each competitive tender contract will be for 5 years, and extended by 2 years on good performance. At this stage, given the implementation is to take place from 2H2016, we do not envisage any financial impact on the bus operators within these two years. Gradual transition. As mentioned by LTA in its announcement, the phased and gradual transition is to allow itself to refine and improve the tendering system as well as handover process.

Industry Focus


Summary and DBS’ comments on new bus operating model Current – Fare Revenue Model New - Government Contracting

Model Implications/ considerations

Description/ model Fare revenue model. Operator earns returns from fare revenue. Bus operators are assigned separate areas of responsibilities and are required to meet the mobility needs of commuters and comply with Quality of Standards (QoS) and the Universal Service Obligations (USO).

Contracting model. LTA determines service and standards and bus operators will bid for the right to operate the services, and the operator will be paid fees.

Positive. Positive for operators as both are incurring losses at the operating level of about S$42m (last 4 quarters to Mar'14) on the current model. However, losses should be lower by 2016 given fare increases.

Assets Buses owned by operator, though depots are leased from the Government for a token sum only

LTA will own all operating assets, depots, buses and fleet management systems

Positive. Positive for operators, as it reduces capex requirements, freeing up resources. However, this will also mean heightened competition with lower barriers to entry.

Competition/ share Only SMRT and SBST with market shares of c.25% and 75% respectively.

Lower barriers of entry, likely to see more competition. Total services split into 12 packages, with about 300-500 buses each. LTA to tender 3 packages (20%) of bus fleet. Remaining 9 packages (80%) based on negotiated contracts with LTA.

Neutral to marginally negative. SBST/ SMRT likely to retain major shares, though competition will pick up thereafter.

Timeline Tender from 2H14, implementation from 2H 2016.

No near term financial impact on operators for 2014/15 and 1H2016.

Length of contract 5 + 2 years, from 2016

Source: DBS Bank, LTA Stocks

Share price changes (%/ S$m) since certain key dates CD and SMRT YTD share price performances

Increase since CD SMRT Total

Since 21 May % 12.6% 10.1% 11.84%

S$m 616 221 837 Since 15 May

% 14.1% 18.4% 15.36% S$m 680 373 1,053

Since 23 Apr % 27.6% 54.1% 34.64%

S$m 1,190 845 2,035

Price reference date as of 23 July 2014

Source: ThomsonReuters, DBS Bank Source: ThomsonReuters, DBS Bank Neutral view with strong price performances since 2Q. Given the strong share price performances since Apr on recent announcements regarding changes to the public transport scene, we now adopt a neutral view on the sector. We believe the market has priced in positives on impending changes and could be too optimistic on the timeframe, particularly the new Rail Financing Model.

ComfortDelGro: Downgrade to HOLD, TP revised to S$2.70. We have consistently recommending CD in the past based on its geographical diversification, consistent track record and below historical average valuations (<15x). Whilst we still like the company, its recent share price performance has regrettably made valuations (+1.5 std dev) less attractive. We acknowledge that this could be on the back of better outlook for its Singapore public bus operations, but our view is that this may already have been priced in since the announcements in

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Index, rebased at 100 as of 1 Jan 2014

Industry Focus


May. Share price has risen by 15% since then. Unless there are further new developments, we prefer to accumulate at a lower price at c.$2.30 – 2.40, presenting about 10% - 15% upside to our TP. SMRT: Maintain HOLD, TP revised to S$1.60. No doubt SMRT would see its earnings turning up from FY15, but valuations are expensive, at 33x/26x FY15/16F with share price already up c.59% from recent lows (at S$1.02). Unless one holds a long term view (ie >3 years) and is very certain of the outcome from the new Rail Financing Model. We project SMRT’s capex requirements to remain high, which would push its net debt/equity to 0.9x till FY16F, before tapering off. If our projections are right, we could only see the asset-light model come into play in 2019, and result in 18-25Scts cash distribution available to shareholders. We are not ready to take a bet on this given the dearth of details and our view that implementation could only be seen in 2018/19. Maintain HOLD, TP at S$1.60 already reflects positive changes. Despite high valuations, we believe market expectations on rail reforms could continue to support its share price.

Risks to our views. Policies announcement, early than expected implementation. Our current neutral view is premised on our thesis that we do not expect changes on rail to happen soon, and expect implementation only in 2019. In addition, we also believe accretion to operators’ bottomline is insignificant, save for lighter balance sheet lower capex requirements, given possibility of a licence charge. In the event that changes happen faster than our expectations, and/or the announced changes are deemed to benefit the rail operators immensely, this could provide upside to our earnings, and TP. Higher margins seen for buses. We have assumed operating margins of 5%-10% for the bus contracts. In the event that the actual margins are significantly higher/lower, this could pose upside/downside risks to our earnings, and TPs. However, we do note that the realization of this risk will be post 2H2016, since it is likely that there should not be actual disclosure until the operating results are out. Competition remains limited for buses even with competitive tendering. We have assumed entry of new players and for competition to pick up, given the asset-light model for buses. In the event that the incumbent continues to dominate the industry, this could change the dynamics, margins and valuation outlook.

CD price and PE band chart CD PE trading band

Source: Bloomberg Finance L.P., DBS Bank Source: Bloomberg Finance L.P., DBS Bank

SMRT price and PE band chart SMRT PE trading band

Source: Bloomberg Finance L.P., DBS Bank Source: Bloomberg Finance L.P., DBS Bank

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Industry Focus


STOCK PROFILES

www.dbsvickers.com ed: SGC / sa: YM

Bloomberg: CD SP | Reuters: CMDG.SI Refer to important disclosures at the end of this report

HOLD S$2.58 STI : 3,356.08 (Downgrade from BUY) Price Target : 12 months S$ 2.70 (Prev S$ 2.50) Reason for Report : Change in recommendation, TP Potential Catalyst: Accretive acquisitions DBS vs Consensus: FY15F/16F marginally below consensus Analyst Andy SIM CFA +65 6682 3718 [email protected]

Price Relative

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Relative IndexS$

ComfortDelgro (LHS) Relative STI INDEX (RHS) Forecasts and Valuation FY Dec (S$ m) 2013A 2014F 2015F 2016F

Turnover 3,748 3,927 4,136 4,230 EBITDA 768 808 844 851 Pre-tax Profit 414 445 460 503 Net Profit 263 274 287 314 Net Pft (Pre Ex.) 263 274 287 314 EPS (S cts) 12.5 12.9 13.5 14.8 EPS Pre Ex. (S cts) 12.5 12.9 13.5 14.8 EPS Gth (%) 5 3 5 10 EPS Gth Pre Ex (%) 5 3 5 10 Diluted EPS (S cts) 12.4 12.9 13.5 14.7 Net DPS (S cts) 7.0 7.5 8.1 9.2 BV Per Share (S cts) 102.0 107.3 113.3 120.0 PE (X) 20.7 20.0 19.1 17.5 PE Pre Ex. (X) 20.7 20.0 19.1 17.5 P/Cash Flow (X) 7.8 7.4 7.2 7.3 EV/EBITDA (X) 7.9 7.5 7.0 6.7 Net Div Yield (%) 2.7 2.9 3.1 3.6 P/Book Value (X) 2.5 2.4 2.3 2.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 12.6 12.4 12.2 12.7 Earnings Rev (%): - 1 - Consensus EPS (S cts): 13.1 13.9 15.3 Other Broker Recs: B: 12 S: 2 H: 1 ICB Industry : Consumer Services ICB Sector: Travel & Leisure Principal Business: Major operator of taxi, bus and rail passenger transport services.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P.

At A Glance Issued Capital (m shrs) 2,135 Mkt. Cap (S$m/US$m) 5,509 / 4,437 Major Shareholders Capital Group Companies (%) 6.3 Blackrock (%) 6.0 Free Float (%) 87.7 Avg. Daily Vol.(‘000) 5,919

Industry Focus

ComfortDelgro

Accumulate at lower price• Recent share price rally has priced in positive

impact of proposed bus contracting model

• New Rail Financing Model to have minimal impact on CD

• Downgrade to HOLD on limited upside, prefer to accumulate at lower price

• Raised TP to S$2.70 after upgrading FY16F earnings

Positive bus contract model priced in. The upcoming changes to Singapore’s bus operating model will benefit operators. But CD’s share price has risen substantially since the announcement in May. We estimate the market is valuing the overall bus operation at 12x-25x PE under the new model in 2H 2016. This may not seem excessive but one needs to note that this model will only take effect about two years from now, and the contracts are for a period of 5+2 years.

New rail model to have limited impact on CD. We feel the market is too optimistic of the timing and details of the new Rail Financing Model (RFM). In any case, we do not expect a major impact on CD, although it could result in a higher licence charge for its North-East Line. However, given the scale of the Group’s operations in Singapore and overseas, this should have minimal impact on bottomline. Its Downtown Line is already under the new RFM.

Downgrade to HOLD despite higher TP of S$2.70. We had been recommending CD for its geographical diversification, consistent track record, and below historical average valuation (c.15x PE). We still like the company, but the recent share price rally has made valuation less attractive now at +1.5SD of its historical average multiple. We would prefer to accumulate at S$2.30-2.40, which would then offer 10%-15% upside to our revised TP of S$2.70. We nudged up our TP after imputing stronger FY16F earnings driven by higher margins for its Singapore bus operation.

Industry Focus

ComfortDelgro

Valuation methodology

Methodology Market Cap

(S$m) Remarks

PE 4,302 15x FY15F PE

DCF 7,159 WACC 8.7%; terminal growth

1%

Average 5,730 Average of PE and DCF

No. of shares (m) 2,126

Price Target (S$/share) 2.70

Implied PER - FY14F 20.9

Implied PER - FY15F 20.0 Source: DBS Bank

Industry Focus

ComfortDelgro

Key Assumptions

FY Dec 2012A 2013A 2014F 2015F 2016F SGP bus ridership growth 3.1 3.4 3.0 3.0 3.0 SGP fare chg (%) 3.0 3.8 2.5 3.0 3.0 Avg oil price (US$) 95.0 95.0 100.0 105.0 110.0 Chg in staff strength (%) (9.1) 2.0 0.5 1.0 (0.5)

Segmental Breakdown FY Dec 2012A 2013A 2014F 2015F 2016F

Revenues (S$ m) Bus & Bus Station 1,745 1,890 1,928 2,012 2,004 Rail 153 165 195 217 236 Taxi 1,121 1,198 1,283 1,375 1,444 Automotive Engn 355 317 332 339 346 Others 171 179 188 193 199 Total 3,545 3,748 3,927 4,136 4,230 Operating Profit (S$ m) Bus & Bus Station 157 170 179 193 212 Rail 14 5 2 0 2 Taxi 140 146 156 168 176 Automotive Engn 51 53 53 54 55 Others 50 53 66 54 56 Total 412 426 457 468 502 Opg Profit Margins (%) Bus & Bus Station 9.0 9.0 9.3 9.6 10.6 Rail 9.3 2.9 1.0 0.0 1.0 Taxi 12.5 12.2 12.2 12.2 12.2 Automotive Engn 14.4 16.7 16.0 16.0 16.0 Others 29.0 29.5 35.3 27.7 28.1 Total 11.6 11.4 11.6 11.3 11.9

Income Statement (S$ m)

FY Dec 2012A 2013A 2014F 2015F 2016F Revenue 3,545 3,748 3,927 4,136 4,230 Cost of Goods Sold 0 0 0 0 0 Gross Profit 3,545 3,748 3,927 4,136 4,230 Other Opng (Exp)/Inc (3,133) (3,321) (3,470) (3,668) (3,728) Operating Profit 412 426 457 468 502 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 4 4 4 5 5 Net Interest (Exp)/Inc (20) (16) (17) (14) (4) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 396 414 445 460 503 Tax (86) (87) (93) (97) (106) Minority Interest (62) (64) (77) (76) (83) Preference Dividend 0 0 0 0 0 Net Profit 249 263 274 287 314 Net Profit before Except. 249 263 274 287 314 EBITDA 739 768 808 844 851 Growth Revenue Gth (%) 3.9 5.7 4.8 5.3 2.3 EBITDA Gth (%) 2.5 3.9 5.2 4.6 0.7 Opg Profit Gth (%) 3.3 3.4 7.2 2.5 7.2 Net Profit Gth (%) 5.6 5.7 4.1 4.7 9.5 Margins & Ratio Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margin (%) 11.6 11.4 11.6 11.3 11.9 Net Profit Margin (%) 7.0 7.0 7.0 6.9 7.4 ROAE (%) 12.8 12.6 12.4 12.2 12.7 ROA (%) 5.3 5.3 5.2 5.3 5.7 ROCE (%) 8.3 8.2 8.3 8.2 8.8 Div Payout Ratio (%) 54.0 56.2 58.0 60.0 62.0 Net Interest Cover (x) 20.7 26.6 27.1 34.6 120.2

Source: Company, DBS Bank

Margins Trend

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Project bus margins to improve on the back of higher fares in Singapore, and also new bus contracting model from 2H16.

Stronger growth in FY16F on expectations bus contracting model would have positive impact on margins.

Industry Focus

ComfortDelgro

Quarterly / Interim Income Statement (S$ m)

FY Dec 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 Revenue 871 908 978 990 951 Cost of Goods Sold 0 0 0 0 0 Gross Profit 871 908 978 990 951 Other Oper. (Exp)/Inc (775) (796) (856) (895) (849) Operating Profit 96 113 122 95 102 Other Non Opg (Exp)/Inc 3 2 4 3 3 Associates & JV Inc 1 1 0 2 1 Net Interest (Exp)/Inc (7) (7) (7) (6) (6) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 93 108 120 94 99 Tax (21) (23) (25) (19) (22) Minority Interest (15) (16) (18) (15) (14) Net Profit 58 69 77 60 63 Net profit bef Except. 58 69 77 60 63 EBITDA 183 199 211 186 190 Growth Revenue Gth (%) (3.7) 4.3 7.7 1.2 (4.0) EBITDA Gth (%) (0.3) 8.5 6.1 (11.8) 2.2 Opg Profit Gth (%) (0.1) 17.4 8.7 (22.1) 6.4 Net Profit Gth (%) 0.2 19.4 11.3 (21.9) 5.7 Margins Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margins (%) 11.0 12.4 12.5 9.6 10.7 Net Profit Margins (%) 6.6 7.6 7.8 6.0 6.7

Balance Sheet (S$ m) FY Dec 2012A 2013A 2014F 2015F 2016F Net Fixed Assets 2,707 2,777 2,911 2,920 2,827 Invts in Associates & JVs 5 6 11 15 21 Other LT Assets 1,040 1,061 1,061 1,061 1,061 Cash & ST Invts 695 836 948 1,078 1,094 Inventory 58 71 71 75 77 Debtors 143 120 157 165 169 Other Current Assets 199 214 214 214 214 Total Assets 4,846 5,085 5,373 5,529 5,463 ST Debt 77 218 218 218 100 Creditor 634 665 714 752 769 Other Current Liab 195 179 216 219 228 LT Debt 627 590 590 500 300 Other LT Liabilities 676 638 638 638 638 Shareholder’s Equity 2,008 2,155 2,281 2,409 2,551 Minority Interests 629 640 717 793 877 Total Cap. & Liab. 4,846 5,085 5,373 5,529 5,463 Non-Cash Wkg. Capital (429) (440) (487) (516) (537) Net Cash/(Debt) (9) 28 140 360 694 Debtors Turn (avg days) 15.1 12.8 12.9 14.2 14.4 Creditors Turn (avg days) (709.2) (702.5) (727.0) (720.3) (809.2) Inventory Turn (avg days) (64.6) (69.5) (74.9) (72.0) (80.9) Asset Turnover (x) 0.8 0.8 0.8 0.8 0.8 Current Ratio (x) 1.2 1.2 1.2 1.3 1.4 Quick Ratio (x) 0.9 0.9 1.0 1.0 1.2 Net Debt/Equity (X) 0.0 CASH CASH CASH CASH Net Debt/Equity ex MI (X) 0.0 CASH CASH CASH CASH Capex to Debt (%) 69.9 51.7 59.4 52.9 62.5 Z-Score (X) 3.0 2.9 2.9 3.0 3.3


Revenue Trend

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Asset Breakdown (2014)

Net Fixed Assets -71.1%

Assocs'/JVs -0.3%

Bank, Cash and Liquid

Assets -23.0%

Inventory -1.7%

Debtors -3.8%

Industry Focus

ComfortDelgro

Cash Flow Statement (S$ m)

FY Dec 2012A 2013A 2014F 2015F 2016F Pre-Tax Profit 396 414 445 460 503 Dep. & Amort. 323 337 346 371 343 Tax Paid (76) (78) (57) (93) (97) Assoc. & JV Inc/(loss) (4) (4) (4) (5) (5) Chg in Wkg.Cap. 20 6 11 26 12 Other Operating CF 28 22 0 0 0 Net Operating CF 687 698 740 759 756 Capital Exp.(net) (492) (418) (480) (380) (250) Other Invts.(net) (69) (130) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 4 2 0 0 0 Other Investing CF 46 14 0 0 0 Net Investing CF (510) (532) (480) (380) (250) Div Paid (130) (138) (148) (159) (172) Chg in Gross Debt 87 120 0 (90) (318) Capital Issues 16 35 0 0 0 Other Financing CF (29) (55) 0 0 0 Net Financing CF (56) (38) (148) (248) (490) Currency Adjustments (3) 8 0 0 0 Chg in Cash 118 136 112 130 16 Opg CFPS (S cts) 31.7 32.8 34.3 34.5 35.0 Free CFPS (S cts) 9.3 13.3 12.2 17.8 23.8


Capital Expenditure

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www.dbsvickers.com ed: JS / sa: YM

Bloomberg: MRT SP | Reuters: SMRT.SI Refer to important disclosures at the end of this report

HOLD S$1.575 STI : 3,356.08 Price Target : 12-month S$ 1.60 (Prev S$ 1.41) Reason for Report : Change in TP, introduced FY17 forecasts Potential Catalyst: Earlier announcement and favourable outcome of rail reforms DBS vs Consensus: FY16F above consensus, FY17F below consensus Analyst Andy SIM CFA +65 6682 3718 [email protected]

Price Relative

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Relative IndexS$

SMRT (LHS) Relative STI INDEX (RHS) Forecasts and Valuation FY Mar (S$ m) 2014A 2015F 2016F 2017F

Turnover 1,164 1,244 1,324 1,344 EBITDA 255 279 321 335 Pre-tax Profit 75 89 112 130 Net Profit 62 74 93 108 Net Pft (Pre Ex.) 62 74 93 108 EPS (S cts) 4.1 4.9 6.1 7.1 EPS Pre Ex. (S cts) 4.1 4.9 6.1 7.1 EPS Gth (%) (26) 20 25 17 EPS Gth Pre Ex (%) (26) 20 25 17 Diluted EPS (S cts) 4.1 4.9 6.1 7.1 Net DPS (S cts) 2.2 2.7 3.2 4.2 BV Per Share (S cts) 52.7 55.4 58.7 62.6 PE (X) 38.7 32.3 25.9 22.2 PE Pre Ex. (X) 38.7 32.3 25.9 22.2 P/Cash Flow (X) 10.2 7.2 7.9 8.0 EV/EBITDA (X) 11.3 11.0 10.0 9.4 Net Div Yield (%) 1.4 1.7 2.0 2.7 P/Book Value (X) 3.0 2.8 2.7 2.5 Net Debt/Equity (X) 0.6 0.8 0.9 0.8 ROAE (%) 7.9 9.0 10.7 11.7 Earnings Rev (%): (1) (3) N/A Consensus EPS (S cts): 4.8 5.9 8.6 Other Broker Recs: B: 4 S: 5 H: 4 ICB Industry : Consumer Services ICB Sector: Travel & Leisure Principal Business: Primarily involved in operating the main MRT line in Singapore.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P.

At A Glance Issued Capital (m shrs) 1,522 Mkt. Cap (S$m/US$m) 2,434 / 1,961 Major Shareholders Temasek Holdings Pte Ltd (%) 54.3 Free Float (%) 45.7 Avg. Daily Vol.(‘000) 4,456

Industry Focus

SMRT

Rail reforms still some time away

• Market is too optimistic of timing and details of rail reforms

• Expect changes to happen only in 2019

• Expect earnings to turn around from FY14 lows, but valuation is stretched

• HOLD, raised TP to S$1.60 Market is too optimistic of timing of rail reforms. SMRT’s recent share price performance indicates the market could be too optimistic of the expected change in the Rail Financing Model (RFM), in our view. We only expect changes to be implemented in 2019. Referencing SMRT’s recent proposal for a sustainable framework, the Transport Minister also indicated that a “wide gap” exists between SMRT’s expectations and LTA’s stand.

New rail model will be asset-light, but need to consider licence charge. A likely positive outcome for SMRT will be transition into an asset-light model. This will relieve SMRT of heavy capex and financing requirements. However, such a change could prompt the LTA to introduce a licencing charge to use the operating assets, similar to that for SBSTransit’s Downtown Line (DTL). As mentioned, this would likely happen only in 2019, and meanwhile, SMRT has c.S$900m financial/capex commitments for the North-South-East-West Line (NSEWL) up till 2019, which would raise Net D/E to 0.9x in FY16F before tapering off thereafter.

HOLD, valuation is stretched. The market is very excited about the new RFM benefiting SMRT, but we would not bet on this yet given few details and our view that changes would only be seen in 2019. We raised TP to S$1.60 to take into account stronger growth in FY17F (vs previous expectations) arising from the new bus contracting model. The share price already reflects positive changes; valuation is stretched at 33x/26x FY15F/16F PE currently. However, market expectations on rail reforms could continue to support the share price.

Industry Focus

SMRT

Valuation methodology

Methodology Market

Cap (S$m) S$/share Remarks Blackrock (%)

PE 1,666 1.10 18x FY16F earnings, historical average

DCF 3,196 2.10 WACC 5.23%, terminal growth 1%

Average 2,431 1.60 Average of PE and DCF

No. of shares (m) 1,522

Price Target (S$/share) 1.60 2%



Industry Focus

SMRT

Key Assumptions

FY Mar 2013A 2014A 2015F 2016F 2017F MRT ridership growth (%) 5.6 2.9 2.0 3.0 3.0 Bus ridership growth (%) 3.2 4.6 3.0 3.0 3.0 Oil price (US$/bbl) 99.0 100.0 105.0 105.0 110.0 Chg in staff (%) 8.3 6.0 1.0 2.0 (6.0)

Segmental Breakdown FY Mar 2013A 2014A 2015F 2016F 2017F

Revenues (S$ m) MRT Operations 608 624 655 695 730 LRT Operations 11 10 11 11 12 Bus Operations 211 218 231 245 219 Taxi Operations 132 133 138 145 149 Others 88 98 101 108 112 Total 1,119 1,164 1,244 1,324 1,344

Income Statement (S$ m)

FY Mar 2013A 2014A 2015F 2016F 2017F Revenue 1,119 1,164 1,244 1,324 1,344 Cost of Goods Sold 0 0 0 0 0 Gross Profit 1,119 1,164 1,244 1,324 1,344 Other Opng (Exp)/Inc (1,009) (1,080) (1,145) (1,198) (1,196) Operating Profit 110 84 100 125 148 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 (1) (1) (1) Net Interest (Exp)/Inc (5) (9) (10) (13) (17) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 105 75 89 112 130 Tax (22) (13) (14) (18) (21) Minority Interest 0 0 (1) (1) (1) Preference Dividend 0 0 0 0 0 Net Profit 83 62 74 93 108 Net Profit before Except. 83 62 74 93 108 EBITDA 260 255 279 321 335 Growth Revenue Gth (%) 5.9 4.0 6.9 6.4 1.5 EBITDA Gth (%) (7.3) (2.0) 9.4 15.0 4.3 Opg Profit Gth (%) (25.9) (23.6) 18.1 26.1 18.2 Net Profit Gth (%) (30.5) (25.7) 19.7 25.0 16.6 Margins & Ratio Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margin (%) 9.8 7.2 8.0 9.5 11.0 Net Profit Margin (%) 7.4 5.3 6.0 7.0 8.0 ROAE (%) 10.7 7.9 9.0 10.7 11.7 ROA (%) 4.2 2.9 3.4 3.9 4.3 ROCE (%) 6.4 4.3 4.8 5.6 6.2 Div Payout Ratio (%) 45.6 54.1 55.5 52.6 59.2 Net Interest Cover (x) 23.2 9.2 10.0 9.5 8.5


Margins Trend

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

2013A 2014A 2015F 2016F

Operating Margin % Net Income Margin %

Industry Focus

SMRT

Quarterly / Interim Income Statement (S$ m)

FY Mar 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 Revenue 281 285 296 293 290 Cost of Goods Sold 0 0 0 0 0 Gross Profit 281 285 296 293 290 Other Oper. (Exp)/Inc (288) (263) (276) (273) (268) Operating Profit (6) 22 20 20 22 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (2) (2) (2) (2) (3) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit (8) 20 17 18 20 Tax (4) (4) (3) (4) (3) Minority Interest 0 0 0 0 0 Net Profit (12) 16 14 14 17 Net profit bef Except. (12) 16 14 14 17 EBITDA 32 62 62 63 68 Growth Revenue Gth (%) (0.1) 1.2 4.0 (1.0) (1.3) EBITDA Gth (%) (54.7) 93.8 0.7 1.1 7.1 Opg Profit Gth (%) nm nm (9.9) 0.5 9.0 Net Profit Gth (%) nm nm (11.9) (1.2) 18.9 Margins Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margins (%) (2.3) 7.8 6.8 6.9 7.6 Net Profit Margins (%) (4.2) 5.7 4.9 4.9 5.8

Balance Sheet (S$ m) FY Mar 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,436 1,642 1,962 2,165 2,178 Invts in Associates & JVs 51 53 52 52 51 Other LT Assets 46 34 34 34 34 Cash & ST Invts 546 161 62 74 124 Inventory 60 84 83 88 90 Debtors 86 99 83 88 90 Other Current Assets 0 0 0 0 0 Total Assets 2,224 2,073 2,276 2,502 2,567 ST Debt 2 156 156 156 156 Creditor 577 355 415 441 448 Other Current Liab 54 54 65 68 71 LT Debt 607 480 580 730 730 Other LT Liabilities 216 225 217 210 205 Shareholder’s Equity 768 802 842 894 953 Minority Interests 0 0 1 2 3 Total Cap. & Liab. 2,224 2,073 2,276 2,502 2,567 Non-Cash Wkg. Capital (485) (226) (313) (333) (340) Net Cash/(Debt) (63) (476) (675) (812) (762) Debtors Turn (avg days) 24.5 29.0 26.7 23.6 24.1 Creditors Turn (avg days) 238.7 187.3 145.7 155.9 160.9 Inventory Turn (avg days) 24.1 29.0 31.6 31.2 32.2 Asset Turnover (x) 0.6 0.5 0.6 0.6 0.5 Current Ratio (x) 1.1 0.6 0.4 0.4 0.4 Quick Ratio (x) 1.0 0.5 0.2 0.2 0.3 Net Debt/Equity (X) 0.1 0.6 0.8 0.9 0.8 Net Debt/Equity ex MI (X) 0.1 0.6 0.8 0.9 0.8 Capex to Debt (%) 40.7 102.0 67.9 45.1 22.6 Z-Score (X) 2.1 2.1 2.1 2.2 NA


Revenue Trend

-2%

-1%

0%

1%

2%

3%

4%

5%

250

255

260

265

270

275

280

285

290

295

300

3Q

201

2

4Q

201

2

1Q

201

3

2Q

201

3

3Q

201

3

4Q

201

3

1Q

201

4

2Q

201

4

3Q

201

4

4Q

201

4

Revenue Revenue Growth % (QoQ)

Asset Breakdown (2015)

Net Fixed Assets -92.0%

Assocs'/JVs -2.6%

Bank, Cash and Liquid Assets - -

2.7%

Inventory -4.1%

Debtors -4.1%

Industry Focus

SMRT

Cash Flow Statement (S$ m)

FY Mar 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 105 75 89 112 130 Dep. & Amort. 151 171 180 196 187 Tax Paid (15) (5) (4) (14) (18) Assoc. & JV Inc/(loss) 0 0 1 1 1 Chg in Wkg.Cap. (19) (13) 77 16 4 Other Operating CF 38 5 (8) (7) (5) Net Operating CF 260 234 335 303 299 Capital Exp.(net) (248) (649) (500) (400) (200) Other Invts.(net) (17) 5 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 2 2 0 0 0 Net Investing CF (262) (643) (500) (400) (200) Div Paid (109) (30) (33) (41) (49) Chg in Gross Debt 460 29 100 150 0 Capital Issues 0 0 0 0 0 Other Financing CF 3 19 0 0 0 Net Financing CF 353 17 67 109 (49) Currency Adjustments 0 0 0 0 0 Chg in Cash 351 (391) (99) 12 50 Opg CFPS (S cts) 18.4 16.2 16.9 18.9 19.4 Free CFPS (S cts) 0.8 (27.3) (10.9) (6.3) 6.5


Capital Expenditure

0

100

200

300

400

500

600

700

2013A 2014A 2015F 2016F

Capital Expenditure (-)

Capex projected to remain high because of commitments for NSEWL.

Industry Focus


DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published,the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 30 Jun 2014 except ComfortDelgro and SMRT

2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 30 Jun 2014.

3.

Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the company mentioned.

Industry Focus


DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or

located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

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Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR") (formerly known as HwangDBS Vickers Research Sdn Bhd). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

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United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States

Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations. It is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd.

12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

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