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  • www.dbsvickers.com

    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 SMRTs expectations and LTAs 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 SMRTs 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 SBSTransits 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 andysim@dbs.com

    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

    Singapore Land Transport

    Page 2

    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 companys 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 wont happen soon? Our views are premised on the following: (i) recent statement by Transport Minister that a wide gap remains between SMRTs expectations and Land Transport Authority (LTA)s position, implying there are many areas still to be ironed out; (ii) LTAs 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 SMRTs bottomline, after considering licence charge. There are currently no public details disclosed on SMRTs 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 SMRTs 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 Singapores 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 SBSTransits 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 Singapores 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 (

  • Industry Focus

    Singapore Land Transport

    Page 3

    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 SMRTs 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 SMRTs 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 )

  • Industr

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