Maybank KE Report 24 Sep 13

Land Transport: Imminent Changes To Bus Operating Model | Neutral
Ø With stagnating bus fares and rising cost from inflationary pressure, the two existing operators have been running loss-making operations for years. Under a business model that is financially unviable, we believe that SMRT and SBS Transit, a subsidiary of ComfortDelGro, would be reluctant to renew their bus licences when they are due in 2016. Hence, a change to the bus model is imminent, in our view, in favour of a tender system to award packages of service contracts. We believe that the Land Transport Authority (LTA) is currently evaluating the merits of a tender system, as evident from the tender system used to award service contracts since the start of the year.
Ø In the near term, switching to a tender system will be positive for the Public Transport Operators (PTOs) as losses at their bus units will reverse. While competition from new entrants would pose a threat, we believe that the existing operators still have an edge over new entrants with their scale of operations. Even if the operators do concede market share, their profitability under a tender system would still be an improvement over their current loss-making operations.
Ø While switching to a tender system is positive for both PTOs, we maintain our preference for CDG over SMRT. We believe that our forecasts for significantly higher gearing at SMRT over the next few years will be reflected in lower stock valuations. Furthermore, PER valuations for CDG are relatively more attractive under various bus margin scenarios on a tender system. Reiterate BUY CDG, SELL SMRT.

Click here for full report derrickheng@maybank-ke.com.sg
Economics…
Singapore CPI, August 2013: Up Monthly, Moderate For The Year…
Ø Inflation rate picked up for the fourth successive month in Aug 2013 to +2.0% YoY (July 2013: +1.9% YoY) led by the “Housing” and “Food” components. Core inflation rate (CPI ex-accommodation and private road transport) also picked up to +1.8% YoY (July 2013: +1.6% YoY).
Ø From the previous month, inflation jumped by +0.8% MoM (July 2013: +0.3% MoM), the biggest sequential gain in six months.
Ø Year-to-date inflation rate averaged +2.6% YoY (Jan-Aug 2012:+ 4.8% YoY), but has been sliding from the high of 4.2% in Jan-Feb 2013. No change to our full-year estimate of +2.5% (2012: +4.6%), while the official forecast stays at 2%-3%.

Click here for full report suhaimi_ilias@maybank-ib.com