DBS Group Research says the award of the Sembawang-Yishun and Bulim bus contracts to Tower Transit was a “surprise” for the sector. 

On Oct 1, the Land Transport Authority announced the award of the Sembawang-Yishun and Bulim bus contracts to Tower Transit for a 5-year term at a total fee of $1.03 billion over the contract period. 

This includes the current Bulim contract (29 bus services) currently operated by Tower Transit. The Sembawang-Yishun contract consists of 27 bus services, currently operated by SMRT.

Tenders were submitted by the current bus operators – SBSTransit, SMRT Buses, Tower Transit Singapore and The Go-Ahead Group. The combined tender prices for the two packages ranged from about $1 billion to $1.19 billion. 

Analyst Andy Sim said that Tower Transit’s outcome was a surprise on two fronts: Tower Transit securing the bid even though it was not the lowest price; and the two larger operators had the highest and lowest bids. As such, it seems that quality and innovative solutions were indeed big factors that were taken into consideration.

As such, he said the ability for a seemingly new entrant to snag another contract may lead to market concerns that incumbents’ positions are being undermined. 

Back in 2016, the first two competitive tenders were awarded to Tower Transit and Go-Ahead respectively, while SBS Transit secured the third competitive tender for Seletar in 2018.

Sim said that this was a “silver lining” for operators, as the fact that the contract was not awarded to the lowest price bidder shows that “contract value is not the only factor, and there is indeed focus on quality.” 

This, in turn, should bode well for operators and commuters. The next contract coming up is the Sengkang- Hougang contract in 2021, which is currently operated by SBS Transit.

Despite this development, Sim still continues to maintain a “buy” rating for ComfortDelGro - whose subsidiary is SBS Transit - as a “reopening play”. 

CDG’s share price has recently retreated, “possibly on concerns relating to the situation in the UK, coupled with media reports that workers have yet to return to office despite the relaxation by the Singapore authorities since 28 Sep.” he noted. 

But he points out that these are still “early days”, and that companies may need some time to put their policies in place. Sim also believes that at 1.2x PB, which is -2SD of CDG’s historical average, downside risks are priced in.

At 1.13pm, shares of CDG are trading at $1.42, one cent lower than its previous close of $1.43.