SINGAPORE (Mar 22): Phillip Capital is maintaining an “overweight” for Singapore’s land transport sector on regulatory reviews and changes with ComfortDelGro (CDG) its top “buy” pick with a $2.50 target.

In addition, regulatory changes on fare formula and licensing of private-hire car companies could be catalysts for a re-rating for the stock.

In a Thursday report, analyst Richard Leow says, “We forecast CDG's earnings to have bottomed in FY17, with the Public Transport Services segment largely driving earnings going forward.”

See: ComfortDelGro posts 4.9% drop in FY17 earnings to $301.5 mil as competition in taxi business heats up

Singapore’s Public Transport Council is reviewing the existing fare formula and the next fare adjustment could be an increase, as fare adjustments in recent years have not kept pace with higher operating costs.

But any change in fare formula would only be limited to the rail segment only and will not affect the bus segment, says Leow.

In addition, Leow believes that the worst could be over for taxis, as the y-o-y population growth of rental cars have not only moderated, but even contracted year to date.

As the government has expressed its desire for the transport market to remain “open and contestable”, the takeover of Uber by Grab in Singapore could face regulatory resistance.

Furthermore, regulating and licensing of private-hire car companies seems likely in future, as the population of rental cars have grown unabated. This would mean that private-hire car companies Grab and Uber would have to pay for a licence to operate in Singapore.

“This could be beneficial to the taxi segment, should the government decide to curb private-hire car numbers,” says Leow.

Meanwhile, operating losses for the Downtown Line (DTL) is expected to narrow this year, following the start of revenue service for Downtown Line 3 (DTL3) on Oct 21 2017. But due to a 2.2% fare reduction from Dec 29 2017, the DTL3 may see a delay in breaking even.

In addition, the transition of the North East Line (NEL), Sengkang LRT and Punggol LRT (SPLRT) to the New Rail Financing Framework (NRFF) asset-light mode will help SBS Transit alleviate heavy capital expenditures, thus improving cash flow.

The NRFF helps to mitigate large fare-revenue risks through a limited risk-sharing revenue collar with the Land Transport Authority (LTA). NRFF’s EBIT margin for the lines will be capped at around 5% with limited risk-sharing from the LTA if EBIT margin falls below 3.5%.

The framework will also shorten the line licence period to 15 years with a possible five-year extension, compared to 30-40 years under the previous regime. "Hence, the economic moat for rail segment is eroded as it becomes more contestable," says Leow.

As at 10.30am, shares in CDG are trading 1 cent higher at $2.01.