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OCBC: PTOs Profit Margins Up To 9% After New GCM
Aspire, Hot Picks | 08 April 2015
By: Lim Si Jie
Articles (169) Profile

The two PTOs (Public Transport Operators) in Singapore, CDG (ComfortDelGro) and SMRT (SMRT Corp) met market expectations as FY14 came to an end. But where will the transport sector head towards in 2015?

Transport Sector: OVERWEIGHT

OCBC gave the transport sector an OVERWEIGHT rating on expectations of “improvement in profitability on better cost management and productivity gains for both PTOs.” The sector outlook continues to remain buoyed by both short term and long term catalysts.

Short Term Catalysts

1) Growth Expected For Taxi Segment

OCBC expect both PTOs to continue to renew their taxi fleet, which leads to higher rental income from new vehicles.

However, CDG will more likely benefit from growth in the taxi segment. As the only taxi operator to meet the requirements, CDG will be able to increase its fleet size by two percent this year and thereby increasing rental income from its taxi segment.

2) Higher Transport Fare Income For Both PTOs In FY15.

The PTC (Public Transport Council) announced on 21 January the conclusion of the 2014 Fare Review Exercise and granted an overall net fare adjustment of 2.8 percent with effect from 5 April. OCBC noted that both CDG and SMRT’s share prices “gained steadily after the announcement” on the fare hike.

3) Savings From Fuel Prices

Source: FactSet, chart comparing WTI Crude (Blue) Vs CDG (Green) Vs SMRT (Red)

As can be seen in the chart above, while the fall in oil price has been priced into CDG and SMRT’s share prices, OCBC believes there are “more savings to be seen, which are likely to be more visible only in FY16.” With the next OPEC (Organisation of Petroleum Exporting Countries) meeting scheduled in June 2015, oil prices are likely to fluctuate at the current levels, which will probably allow both PTOs to capture the resulting lower diesel and electricity prices.

Long Term Catalysts

1) Shift To New Bus GCM (Government Contracting Model)

With a little more than a year before the new bus GCM commences, LTA (Land Transport Authority) has to take over all the bus assets from the PTOs. Both PTOs have much to gain from the sale of their bus assets to LTA. However, the impact is dependent on how the PTOs are being paid for the divestment of bus assets.

The best case scenario for CDG and SMRT is to receive the payments in lump sums instead of progressive payments. This is essentially because large amounts of extra cash would allow the PTOs to seek for potential acquisitions or pay special dividends to shareholders. OCBC emphasised that the positive impact of the divestment would be “significantly reduced” if LTA decides to pay progressively.

Nevertheless, the transition into the new GCM by 2H16 will definitely make the PTOs’ bus operations profitable. The estimated margin is around the region of nine percent.

2) Potential Shift To New Rail Financing Framework

LTA and the PTOs are still in initial talks for the potential shift in the rail operating model to a new rail financing framework in the future. When the official announcement of concrete details is released to the public, it will most probably have a huge positive impact on SMRT. On the other hand, CDG would not benefit much given that it does not own any train assets.

SMRT’s balance sheet reflected their total train assets to amount to up to $1.0 billion. Similar as the sale of the bus assets, SMRT’s beneficial margins will depend on LTA’s payment terms. Additionally, the switching to the rail framework will also remove SMRT’s obligation of buying over the first set of operating assets of the Circle-Line from LTA in 2019. The estimated book value of the Circle-Line assets is $1.1 billion.

The potential shift in rail framework will free up cash and offer a large cash inflow for SMRT. This would allow it to hand out special dividends, or pursue acquisitions for growth. However, the timeline of the rail financing framework has yet been confirmed and is subjected to LTA’s payment terms.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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