SINGAPORE (April 6): RHB is not ruling out the possibility of a fare hike next year, given the Public Transport Council has started its review of the formula through which bus and train fares are adjusted yearly.
The research house believes the burden of subsiding public transport has shifted to the taxpayer, given recent development of government taking ownership of bus and rail assets as well as stepping up efforts to ramp up services.
Moreover, RHB notes that PTC Chairman Richard Magnus hinted at the possibility of a fare increase where he notes that “service improvements come at a cost” and there “needs to be equitable cost sharing among commuters, taxpayers and public transport operators”.
In a press release last night, the council said review will assess the effectiveness of the current fare adjustment formula and propose improvements in consideration of the changes to the public transport industry.
(See also: PTC starts review of public transport fare adjustment formula and mechanism)
“We anticipate the fare review to be completed by the first quarter of 2018, where the new formula will be applied subsequently,” says RHB in a research note on Thursday morning.
In the event of a fare increase, RHB says this will be a positive for ComfortDelGro’s rail business given that the bus segment has transitioned to the Government Contracting Model (GCM).
“Based on our calculation, we estimate that every 1% change in fare revenue to have a c.0.7-0.8% impact on FY18 net earnings,” says RHB who has a “hold” with a PE-based target price of $2.47 for ComfortDelGro.
While RHB likes management’s execution capability and track record, it expects the operating environment to continue to deteriorate, particularly for the taxi segment with the advent of third-party car hires which has brought about structural changes. The taxi segment accounts for 36% of FY16 group operating profit.
In addition, RHB believes the uncertainties in the UK over the Brexit could impact ComfortDelGro’s operations in the UK as well.
“While the taxi segment is undergoing a structural change, ComfortDelGro’s move to adopt an asset-light model for its rail and bus operations would lead to lower capex,” says RHB.
This could suggest further increases in dividend payout to mitigate the lack of growth due to a more challenging taxi outlook.
Shares of ComfortDelGro are down 1 cent at $2.59.
