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OCBC: Overweight On PTOs Even If They Lose Bus Bids
Aspire, Hot Picks | 22 May 2015
By: Lim Si Jie
Articles (169) Profile

Land Transport Authority (LTA) awarded the contract for Singapore’s first bus package to London-based Tower Transit Group Limited (TTG). Both Comfort DelGro (CDG) and SMRT did not manage to clinch the contract despite having a lower bid. However, OCBC is encouraged by the outcome of the first bus package contract and maintains an OVERWEIGHT outlook on the sector.

OCBC: Weak Results Not Surprising

Source: OCBC, Bloomberg

LTA had stated right from the start that the evaluation process for the bus package contract will be based on both quality and price factors. According to OCBC, the fact that the incumbents did not winning the package was not a “a surprise”.

The five-year contract will start from 2Q16, with TTG will be operating the new Bulim bus depot and 26 bus services from three bus interchanges. TTG will get an estimated total fee of $556.0m over the contract period. This excludes any adjustments made because of inflation, changes in wage levels and fuel costs, service variation and incentive payment.

Key responsibilities of TTG

According to the statement issued by LTA, under the scope for the first bus package contract, TTG’s responsibilities includes:

  1. Operate, manage and maintain the buses and onboard equipment provided by LTA as well as the new Bulim Bus Depot and the three bus interchanges.

  2. Charge and collect fares as approved by the Public Transport Council, on behalf of the Government.

  3. Provide bus service information at all bus stops and bus interchanges served by the bus services.

  4. Provide customer management services, such as lost and found service, and a hotline for commuter feedback and enquiries.

LTA has the option to extend the bus package contract term by two years upon completion if TTG performs well during the five-year period.

GCM’s Positive Impact

OCBC believes that the net impact from transiting to the new bus Government Contracting Model (GCM) “remains positive” even if both CDG and SMRT do not win any of the three bus packages released for competitive tenders.

Both incumbents (CDG through its 75 percent owned SBS Transit and SMRT) are currently still incurring losses from core bus operations with negative operating margins.

However, with the remaining nine packages to remain contracted to the incumbents until 2021. Both CDF and SMRT’s bus operations will likely be profitable during the transition to GCM. Hence, OCBC holds the view that losing these three bus packages was never a concern.

Benchmark For Contract Fees Remain Healthy

The LTA used the tenders of the first three packages as a price-discovery mechanism and the outcome of the first was encouraging. It will alleviate the market’s concern over SMRT’s low bid of potentially driving down the benchmark for the contract fees of the remaining nine bus packages.

Hence, given that the study done by LTA is largely based on London’s bus operating model, OCBC believes that bus operating margin under the GCM, which is likely to commence in 2H16 for the incumbents, will be in the region of seven to nine percent.

Sector Outlook: Maintain OVERWEIGHT

In light of the first bus package’s success, OCBC remains positive on the sector outlook as regulatory changes continue to take place. OCBC expects the incumbents to benefit from the nine bus packages that will make CDG and SMRT operations “profitable on positive margin”.

SMRT: BUY, TP $1.85

CDG: HOLD, TP $3.07

OCBC’s price targets are on the conservative side under the assumption that the incumbents do not win any of the first three bus packages.

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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