Land Transport Sector: Completion of Bus Contracting Model August 12, 2016 1168

  • Agreements reached with SBS Transit and SMRT Buses on remaining services
  • Remaining services reorganised into 11 packages instead of original nine packages
  • Effective 1 September 2016, immediate transition from expiry of existing BSOL
  • Seletar package will commence 1H 2018

What is the news?

The LTA has announced details on the remaining bus services that are not part of the initial three packages of Bulim, Loyang and Seletar, which were put up for competitive bidding. The remaining services have been reorganised into 11 packages, instead of the original nine. All 14 packages will be on the GCM effective 1 September 2016, and all packages will be put out for competitive tendering when their contracts expire. SBS Transit and SMRT Buses will continue operating the Seletar package until 1H 2018. Base contract fees (excluding indexing and incentives) for SBS Transit and SMRT Buses will be S$5.32bn and S$1.87bn, respectively.

How do we view this?

  • No windfall from sale of bus assets, since there is no sale in the first place

Under the contracting model, LTA is supposed to own all operating assets such as buses, and lease them to the operators. For existing services that continue to be operated by SBS Transit and SMRT Buses, LTA will lease the buses from them and pay an availability fee to them; instead of purchasing the buses from them. The availability fee is equivalent to the depreciation expense; this is equivalent to LTA purchasing the buses at net book value less accumulated depreciation. Since there is no sale of buses, shareholders should not expect an upfront lump sum cash payment.

  • Incumbents have retained their market share relative to one another

SBS Transit has historically held c.74% share of the market, with SMRT Buses holding the remaining c.26%. Based on the contract fees of S$5.32bn and S$1.87bn for SBS Transit and SMRT Buses respectively, it appears that they have retained their relative market shares.

  • Our estimates for new market share

According to the LTA, the first three packages of Bulim, Loyang and Seletar are to start off with about 380, 400 and 420 buses respectively; and expected to eventually swell to 500 buses, in line with ridership growth. In view of the remaining 4,000 buses to be distributed between the remaining 11 packages, and assuming neither SBS Transit nor SMRT Buses wins the Seletar package, we estimate SBS Transit’s new market share to be c.57%, and c.20% for SMRT Buses, with new players taking c.23%.

  • Staggered transition for tendering of remaining 11 packages favours the incumbents

All the first three packages of Bulim, Loyang and Seletar are on five-year contracts; whereas the remaining 11 packages on for two to 10 years duration. The first of the 11 contracts to expire has a duration of two years, thereafter four and five years, with the remaining at seven to 10 years. These contracts are for a substantially longer duration than the five years for the first three packages. This allows the incumbents to retain their market share.

Investment Actions

We maintain our existing ratings on the Land Transport Sector for CD (“Buy“, target price: S$3.21) and SMRT (“Accept the Scheme“, target price: S$1.68).

Note: CD will be announcing 2QFY15 financial results this evening after market close.

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About the author

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Richard Leow
Research Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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