SINGAPORE (April 20): DBS is keeping its forecasts for ComfortDelgro unchanged for now although subsidiary SBS Transit was announced as the winner of the latest bus package.
That’s because the transition will be implemented in phases and only take place from 2018, says analyst Andy Sim in a research report out today.
“We maintain our buy recommendation on ComfortDelgro given its ability to deliver steady and consistent growth,” says Sim. DBS has a $2.94 target price for the stock.
Furthermore, the implementation of tighter regulations on private hire cars from July 1 should help to level the playing field.
The Land Transport Authority announced last night the results of the third bus package (Seletar Bus Package) and this was awarded to SBS Transit (SBST).
(See also: SBS Transit wins Seletar Bus Package contract for $480 mil)
SBST's tender price was at $480.3 million for the five-year contract. The bid was the lowest among the 10 bids received. The contract value includes the one-off pre-operation costs, total service fee and lease charges for assets provided by LTA. However it excludes adjustments for inflation, changes in wage levels and fuel costs, incentive payments and service variations.
There are a total of 26 bus services within the Seletar Bus Package, of which two will be new services. Of the remaining 24, SBST is currently operating 13 services, while SMRT currently runs the other 11 services. The bus services will be handed over to SBST in five tranches from 1Q of 2018 to smoothen the transition process.
The win came as a pleasant surprise to DBS though.
“We had earlier envisaged that the three contracts put up for competitive tender would be won by non-incumbents, given the drive towards a more vibrant and competitive environment,” says Sim.
The Bulim Bus Package and Loyang Bus Package were won by Tower Transit Group and The Go-Ahead Group respectively.
DBS notes that SBST and SMRT had submitted the lowest and second lowest bids respectively, which was not surprising given their incumbent status. This was a departure from the second tender where SBST and SMRT submitted the fourth and sixth lowest bids.
“We believe this could be due to more certainty on the operations, given that this tender is the only one closed after the transition to the contracting model on Sept 1 2016,” adds Sim.
“That said, we estimate that this should only have an impact of c.1-2% to our forecasts,” says Sim.
Shares of ComfortDelgro are up 4 cents at $2.65 while shares of SBS Transit are up 3 cents at $2.76.
