Focus falls on rail after bus overhaul

[SINGAPORE] With the revamp of the public bus sector announced and digested, the focus now has shifted to rail, with SMRT Corp shares getting a boost from speculation that the government may also assume ownership of its rail operating assets.

SMRT yesterday closed 3.5 cents higher at $1.47 on heavy volume of 35.6 million shares, or an almost 50 per cent gain in just four weeks.

But the train operator's stock did not have a good start to the day. It fell at the opening, and was down almost 4 per cent to the day's low of $1.375 in the morning.

Some analysts blamed the dip on profit-taking or negative reactions after the new public bus contracting model was unveiled on Wednesday.

Under this model, the government will own the assets of the two transport operators, SBS Transit and SMRT Corp.

The bus operators will then be contracted to run bus services through a competitive tendering process from the second half of 2016, with new entrants to the market expected apart from the two incumbents.

Only 20 per cent of routes will be tendered out initially, with the remaining 80 per cent to be operated by the incumbents at negotiated rates.

Since SBST and its parent ComfortDelGro are bigger, and the latter also has overseas experience with bus contracting, the group was seen as likely to benefit more from the new regime than SMRT.

So some analysts were taken aback when SMRT's stock rebounded in the afternoon into positive territory.

One analyst who was surprised by its resilience attributed its gains to anticipation about an impending rail asset purchase by the government, similar to the bus contracting model.

The operating assets, valued at more than $800 million, would then be leased to SMRT.

"Actually I thought it would weaken after having run up so strongly, especially since the impact of bus contracting will only be felt in 2017," he said.

He attributed the strong volume to the stock's liquidity after institutional funds sold off their SMRT shares over the past two years because of its poor operating performance.

Maybank Kim Eng's Derrick Heng said now that bus restructuring is done, the market is naturally focusing on rail.

But he advised caution due to the uncertainty over what is likely to be a more complicated transition.

This is because of "the challenging process of unwinding contractual agreements under the old regime".

"In particular, the treatment of existing asset purchase obligations in the transition process and future licensing charge are key details that remain lacking," said Mr Heng. "Furthermore, unlike the bus licences, which will expire in 2016, the majority of rail lines are contracted under the old regime to beyond 2019."

OSK DMG's Edison Chen is sceptical about a deal but for a different reason.

"We don't think the part about the rail financing framework which involves taking over legacy assets is viable because it is as good as using taxpayers' money to bail out the company which has not been able to keep its costs under control," said Mr Chen.

Maybank Kim Eng has maintained its "sell" rating on SMRT and "buy" rating on ComfortDelGro, which also surprised the market by falling five cents to end at $2.25 yesterday.

However, SBS Transit, the land transport giant's unit, fared better, closing 18.5 cents higher at $1.60.

One analyst said SBST shares jumped because the new model will have a big impact on its bus business, which has been suffering because of low margins.

"But I am a bit surprised by ComfortDelGro's fall because I would have thought its track record overseas will give it an edge when it comes to bidding for contracts, and because its economies of scale may yield better margins," he added.

Part of the reason, he speculated, could be "a bit of profit taking".

"Another reason is that ComfortDelGro has a bigger market share, so it will assume more risk when the industry is opened up to new players," he added. "Some people were slightly disappointed about the lack of details and worry if the operators can compete in the long run."