SINGAPORE (Dec 3): OCBC Investment Research is maintaining its “overweight” recommendation on Singapore’s land transport sector as it expects the growth momentum seen in 2014 will sustain into 2015 based on both near-term and longer-term factors.

In a Dec 3 report, analysts Eugene Chua and Andy Wong Teck Chin say the profitability of Public Transport Operators will improve given an expected fare increase, increasing ridership, lower energy prices and continued efforts to manage costs and increase productivity gains.

The journey for Singapore’s Public Transport Operators (PTOs), namely ComfortDelGro Corporation and SMRT Corporation, has been smooth thus far in 2014, based on their first three quarters’ results, say the analysts.

ComfortDelGro continued to show stable growth as its results for all three quarters of 2014 came in within our expectations. 9M14 PATMI grew 8.1% y-o-y on higher revenue. Its operating margins for 1Q14 through 3Q14 remained stable between 10% and 12% as labour expenses stabilised at around 33% of total revenue.

On the other hand, 2014 had been a year full of pleasant surprises from SMRT as its results for all three quarters for the year exceeded OCBC’s expectations. After six consecutive quarters of operating losses, fare business finally turned profitable driven by higher ridership and higher average fares in 2QFY15 (3QCY14).

The key factors for profitability were disciplined cost management, productivity gains as well as lower electricity and diesel costs, which boosted overall operating margins from 7.6% in 4QFY14 (1QCY14) to 10.6% in 2QFY15.

“In all, we believe both ComfortDelGro and SMRT are on track to meet our 4QCY14 projections,” say the analysts.

Chua and Wong now believe the momentum seen in 2014 will be carried over into 2015 based on both near-term and longer-term factors.

Potential near-term catalysts include the high likelihood that the Public Transport Council (PTC) will grant further fare increase in 2015; lower energy prices which will benefit SMRT more; ridership growth expected to improve, and ComfortDelGro to benefit from higher growth in taxi rental income as it is the only taxi operator in Singapore allowed to grow its taxi fleet by 1% in 1H15.

Meanwhile, the longer-term factors are the announcement of concrete details on the new rail financing model and the shift of bus operating model to the new bus government contracting model.

Although OCBC notes that the impact of the new rail financing framework will have minimal impact on ComfortDelGro since SBS Transit already does not own any train assets. However, under the new bus government contracting model, the research house expects core bus operations for ComfortDelGro and SMRT to turn profitable, but ComfortDelGro is expected to experience more positive impact as it has 75% market share of the bus operations in Singapore.

“Hence, we maintain Overweight on land transport sector, while reiterating BUY rating
on both ComfortDelGro with $3.03 fair value and SMRT with $1.70 fair value,” conclude Chua and Wong.

ComfortDelGro is flat at $2.59 while SMRT is down 0.3% at $1.61 as at 1:49 p.m. local time.