Transport operators' earnings to get a lift as GCM picks up speed

Bus operations will be profitable as assets get divested.

Transport operators’ earnings will get a boost after as the Government Contracting Model (GCM) picks up speed.

According to OCBC, the transition to the new bus GCM in Singapore will see the purchase of the existing buses by LTA from ComfortDelGro and SMRT before the shift takes place in 2H16.

This will help bus operations rake in profits after several quarters of languishing in the red, with OCBC estimating a margin of 7-9%.

“With the transit to the new GCM by 2HCY16, bus operations of both PTOs will turn sustainably profitable based on fees negotiated with LTA for the nine bus packages. We estimate the operating margin is likely to be in the region of 7-9%,” the report stated.

OCBC noted that with the asset-light model, SMRT and ComfortDelGro will have stronger balance sheets and heftier war chests that could be used for more acquisitions.

“The impact from a lightened balance sheet is significant and is a boost to the earnings of both PTOs. It is very clear to us that post transition to GCM and upon divestment of bus assets, both PTOs will see core bus operations turn profitable. Also, with the potential lump sum cash inflow post divestment, there could potentially be special dividend payout or increase the PTOs’ ability to make acquisitions for growth,” the report noted.