• Five-year contract commencing 2Q16
• Impact on incumbents not a concern
• Maintain OVERWEIGHT

Tower Transit Group put in third lowest bid

Singapore Land Transport Authority (LTA) last Friday awarded the contract for Singapore’s first bus package to London-based Tower Transit Group Limited (TTG - refer to page 2 for company details). Recall that TTG’s bid was the third lowest as the incumbents, ComfortDelGro (CDG) and SMRT, were the only ones that put in lower bids than it did. As LTA had stated right from the start that the evaluation process will be based on both quality and price factors, the incumbents not winning the package did not come as a surprise to us. Commencing from 2Q16, the five-year contract will see TTG operates the new Bulim bus depot and 26 bus services from three bus interchanges. TTG will get an estimated total fee of S$556.0m over the contract period, and this excludes any adjustments for inflation, changes in wage levels and fuel costs, service variation and incentive payment.

Net impact of GCM remains positive for incumbents

Previously, we reiterated our view that even if the incumbents (i.e. CDG through its 75% owned SBS Transit and SMRT) do not win all three bus packages to be released for competitive tenders, or that SMRT wins the low bid put in, the net impact from this transition to the new bus government contracting model (GCM) remains positive. Looking at the bigger picture, both incumbents are currently still incurring losses from core bus operations (i.e. negative operating margin) and with the remaining nine packages to remain with the incumbents until 2021, the transition to GCM will see bus operations for both CDG and SMRT turn profitable from 2H16. Hence, in our view, losing these three bus packages was never a concern.

Furthermore, with LTA using the tenders of the first three packages as a price-discovery mechanism, we are encouraged by the first tender outcome. We think it certainly alleviate the market concern over SMRT’s low bid of potentially driving down the benchmark used by LTA to negotiate with the incumbents for the contract fees of the remaining nine bus packages. Hence, given that the study done by LTA is largely based on the London bus operating model, our assumptions for bus operating margin is still in the region of 7-9% under the GCM which is likely to commence in 2H16 for the incumbents.

Maintain OVERWEIGHT

In light of the outcome of the first bus package, we remain positive on the sector outlook as regulatory changes continue to take place. The incumbents are likely to benefit from the nine bus packages, which we expect operations to turn profitable on positive margin. Hence, we maintain OVERWEIGHT on the land transport sector, as we reiterate BUY on SMRT [FV: S$1.85] and HOLD on CDG [FV: S$3.07]. Also, our forecasts are on the conservative side as we previously assumed that the incumbents do not win any of the first three packages.

Source: OCBC Research - 11 May 2015