• Revenue and PATMI were within our expectation
• Proposed acquisition of Buslink (Australia) and set up of corporate venture capital fund

Upgrade to BUY; new target price of S$2.69 (previously $2.78) as we raise our assumptions for staff, repair and maintenance costs

The Positives

• Public Transport Services EBIT benefitted from 71% YoY higher SBS Transit EBIT. This was from commencement of Seletar bus package in March 2018, operation of bridging shuttle services for early closure and late opening of the East-West MRT Line and higher ridership on Downtown Line (DTL) following the commencement of DTL3 in October 2018.
• Full 4.3% fare increase for Singapore is a welcome positive, but impact to the Group is limited. Our model assumes 0% increase, and the 4.3% increase adds 1 cent to our target price. Impact is limited only to the Rail business segment of the Group. Fare revenue from Rail business segment contributed <7% to Group revenue for the quarter, by our estimate. Nonetheless, the fare increase would accelerate the turnaround for DTL, which is still loss-making.
• DTL loss has narrowed, in line with the 83% higher YoY ridership. DTL loss for the quarter was ~$8.6mn. That is 8% lower QoQ and 30% lower YoY. Current projection is for DTL turnaround in 2H 2019.

The Negatives

• Increase in opex outpaced the increase in revenue, resulting in YoY margin compression from 12.5% to 11.7%. Pressure point came from +13% YoY higher staff costs (49% of opex), due to additional headcount for Seletar bus package. Margin compression was also due to only S$2+mn contribution to EBIT from new acquisitions. Management attributed this to transitional effect of integration.
• Taxi 3Q profit 10% lower YoY. This was mainly due to the 16.5% smaller Singapore (Comfort and CityCab) fleet. Consequently, the Singapore fleet idle rate remains low at ~2%. Nonetheless, overall Taxi profit has remained stable in all three quarters YTD, aided by acquisitions in UK (Dial-a-Cab) and Australia (Metro Taxis).
• Goodwill on balance sheet increased 31% YTD as a result of acquisitions. Consequently, goodwill now accounts for 11.4% of total assets, compared to 10-year historical average of 5.5%. In our previous report, we projected goodwill to reach 11.7% of total assets by the end of FY18. We now raise our estimate to 14% of total assets by the end of FY18, after factoring in the proposed acquisition of the Buslink Companies. We also expect the Group to move into a temporary net debt position, as cash is utilised for inorganic growth.

Outlook

The outlook is positive. Our expectation in our previous report was for 2H18 to be stronger than 1H18 due to organic and inorganic growth. So far, YoY decline in PATMI has been narrowing and we expect YoY growth in 4Q18. 3Q18 PATMI (-2%YoY) is also comparatively better than 9M18 (-9.2%YoY). Recent and pipeline acquisitions to contribute positively to Group earnings.

Upgrade to BUY; new target price of $2.69 (previously $2.78)

Our lower target price is due to higher assumptions for staff, repair and maintenance costs. Our FY18e/FY19e revenue is +1%/+2% from previous estimate, and PATMI is ‑1%/-5% from previous estimate. Our target price gives an implied FY18e forward P/E multiple of 19.2 times. The 10.4 cents full year dividend is sustainable, supported by positive free cash flow.