Singapore’s transport reform is no cause for joy for local investors: DBS

Everyone is hoping for too much too soon.

The country’s impending transport reforms have long been in the headlines, but analysts warn that investors have been overly enthusiastic on the reform timing and the potential benefits to local transport operators.

When it comes to rail transport, a report by DBS warns that investors are hoping for too much too soon. This is especially true given that the Transport Minister recently stated in Parliament that a “wide gap” remains between SMRT’s expectations and LTA’s stand on the new Rail Financing Model.

Meanwhile, recent share price movements for bus operators show that positive changes have already been priced in. However, margins are likely to be low compared to similar bus operations in the UK or Australia, given that Singapore’s bus contracting model will be asset-light.

“In view of the strong share price performances since Apr from recent announcements on changes to the public transport scene, we now adopt a neutral view on both land transport stocks under coverage. We believe the market has priced in the positives on impending changes and could be too optimistic on
the timeframe, particularly the new RFM,” stated DBS.

Here’s more:
We expect implementation to still be some time away, and likely to take place only in 2019. Except for the benefit of relieving SMRT from huge capex requirements, it remains unclear if the new framework will be accretive to SMRT’s bottomline.

Assuming the rail assets are transferred back to LTA at net book value (c.S$1.1bn), we estimate SMRT to turn into a net cash company in c.2019. However, this is not before an estimated S$900m in capex commitments on theNorth-South-East-West Line (NSEWL) is spent from 2014-19.

Based on our assumptions and the increase in market values of CD and SMRT, we estimate that the market is attributing 12-25x PE for both SMRT and SBSTransit’s bus operations, under the new contracting model
post 2H2016.

While the estimated valuation in itself does not seem excessive, we have to note that the change will take
place only in 2 years’ time, and the contract period is for 5+2 years.

We also believe margins are likely to be in the lower range of our assumption (5% to 10%) and below compared to similar bus operations in the UK or Australia, given that Singapore’s bus contracting model will be asset-light, ie LTA will own the assets.