Here's why the new bus contracting model will not offset SMRT's rail woes

Bus operation forms only 1% of the operating profit.

While the new bus government contracting model (GCM) of the Land Transport Authority seems to be a good deal for SMRT particularly in its bus operations, it will not augment its losses in rail business.

According to OCBC Investment Research analysts, the operation profit of core bus operations forms only around 1% of the total operating profit.

On the other hand, half of the year's revenue from bus operations only constitutes 19% of the total revenue.

Under the deal, which will take into effect in September, SMRT will operate three packages over four to seven years and receive $1.865 million in estimated total contract fees.

"In our view, the impact from the transition to bus GCM will likely turn core bus operations sustainably profitable but is not expected to overcome the weak outlook from SMRT’s rail operation," analysts from OCBC said in a report.

Recently, SMRT reported a 22.9% reduction in net profit due to losses in the rail business, primarily due to a lower average fare and higher cost for staffing and maintenance.