Published January 29, 2009

Public transport stocks seen as beneficiaries

By LYNETTE KHOO

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PUBLIC transport stocks are looking good as key beneficiaries of a slew of measures in the latest Budget.

Defensive stock: Firm ridership and falling oil prices are expected to provide resilience to SMRT's earnings

The recessionary mood may also result in higher passenger numbers as people choose more affordable public transport over private transport, analysts say.

Yesterday, ComfortDelgro gained 11 cents or 7.9 per cent to $1.50 and SMRT edged up one cent or 0.6 per cent to $1.60. SBS Transit, the rail and bus arm of ComfortDelGro, rose five cents or 2.9 per cent to $1.78.

Transport-friendly measures in last week's Budget include a 30 per cent road tax rebate and a one-year waiver of the diesel tax for unhired taxis.

In a report issued yesterday, CIMB-GK analyst Lawrence Lye keeps his 'overweight' rating on the public transport sector.

'We continue to like the sector for its relative defensiveness amid a tough recession, given that people will need to move about in the most affordable way, supporting ridership,' Mr Lye said. 'The 40 per cent property tax rebate should also benefit SMRT, which has net lettable space of over 26,000 sq metres.'

According to Government estimates, the road tax rebate will save taxi companies about $7 million and the diesel tax waiver will provide savings of about $6 million. This will benefit taxi hirers facing flagging demand.

Both ComfortDelgro and SMRT are in discussions with the Public Transport Council (PTC) to cut bus and train fares by end-February.

Mr Lye said he is keeping an 'outperform' rating on ComfortDelgro and SMRT with respective target prices of $1.97 and $2.08. But he does not expect the benefits from the Budget incentives to be substantial after the savings are passed to commuters and taxi hirers.

Deutsche Bank and UOB KayHian are sticking with their 'buy' calls on SMRT, though they expect the benefits derived from the Budget to have a neutral impact on earnings.

'Although the benefits of cost savings from the budget are likely to be passed on, firm ridership and falling oil prices provide resilience to earnings,' said Deutsche Bank analyst James Tan. UOB KayHian cited strong cash earnings and stable yield of 6.1 per cent as key positives.

But some analysts are making 'neutral' calls on SMRT for the same reason - that any benefits from the Budget measures will likely be passed on rather than hoarded.

DMG & Partners Securities and Credit Suisse are maintaining their 'neutral' ratings on SMRT, while Citi has reiterated a 'hold' call on the stock.

JPMorgan maintains a 'neutral' rating on SMRT and reiterates its preference for ComfortDelgro with an 'overweight' rating.

ComfortDelgro enjoys cost pass-through mechanisms in its overseas earnings in the UK and Australia, where it derives over 40 per cent of its group earnings, and should suffer a negligible impact with no fare increase for 2010, the brokerage said.