A foreign operator beating out SMRT and SBS Transit, along with a host of other hopefuls, to nab the first package of bus routes put up for tender might have left the two incumbent public transport operators disappointed, and led to some transport analysts describing it as a “wake-up call” for SMRT and SBS Transit.
But as far as investors and market watchers are concerned, the failure to land the contract was a boost to the two public-listed companies: On Monday (May 11), the first trading day following the announcement last Friday after market hours that United Kingdom-based Tower Transit won the contract, the share prices of both SMRT and SBS Transit went up.
SMRT’s share price increased to S$1.635, from S$1.61, while SBS Transit’s shares were priced at S$1.825 each, up from S$1.80. On Tuesday, the share prices of SMRT and SBS Transit closed at S$1.625 and S$1.85, respectively.
Over the contract period of five years, the Government will pay Tower Transit an estimated S$556 million. SMRT asked for the lowest fee at S$453 million while SBS Transit, owned by ComfortDelGro, sought S$600 million.
While losing out on the contract could erode the market shares of SBS Transit and SMRT, investment analysts pointed to the fact that the two operators are losing money in their bus operations. With SMRT submitting the lowest bid, they felt that it had dodged a bullet.
Phillip Capital Research investment analyst Richard Leow said in a research note: “On the assumption of a 10 per cent operating margin for Tower Transit … SMRT could potentially have entered into a loss-making contract.”
A two-envelope process was used to evaluate the tender: LTA evaluated the quality of the proposals first. It only looked at the prices after the bids had passed the quality evaluation. Tower Transit’s winning bid achieved the highest combined score for quality and price.
Deutsche Bank research analyst Joe Liew said in a research note that the outcome was a positive development for stocks in the sector. “The market feared that the margins under the (Government Contracting Model) was going to be very unattractive after seeing SMRT’s low bid,” he said.
Under the new Government Contracting Model announced in May last year, the Land Transport Authority will own and fund all bus infrastructure – such as buses, depots, and fare systems – while contracting bus routes out via a competitive tendering process.
From the second quarter of next year, Tower Transit will operate the new Bulim Bus Depot and ply 26 bus services from the Jurong East, Bukit Batok and Clementi interchanges. Of these 26 services, SBS currently operates 17 of them and SMRT, nine.
Investment analysts said that market share of SBS Transit – the biggest bus operator here – could potentially be eroded from 75 per cent to 56 per cent. SMRT’s market share could potentially go down from 25 per cent to 19 per cent.
Mr Nicholas Teo, market analyst at CMC Markets, said: “SMRT and SBS Transit have been losing money in all these bus operations, because they are bogged down by maintenance and depreciation of fixed assets. Now they can put away these fears, and focus on mining their service for a fee.”
Agreeing, Mr Eugene Chua, Investment Analyst at OCBC Investment Research, added: “Looking at the bigger picture, both incumbents are still incurring losses from core bus operations (with) negative operating margin, and with the remaining nine packages to remain with the incumbents until 2021, the transition to the government contracting model will see bus operations for both ComfortDelGro and SMRT turn profitable from second half of 2016.”
Under the model, the bus routes across the island would be split into 12 packages. Mr Chua said even if SBS Transit and SMRT fail to win any of the three packages that would be tendered out first, it would not be a concern.
Yesterday, SBS Transit reported a 44.6 per cent jump in first-quarter profit as it benefited from higher fares and ridership as well as lower fuel and electricity costs. For the three months ended March 31, net profit totalled S$4.8 million, up from S$3.3 million in the corresponding period a year earlier, SBS Transit said after the market closed.
However, the core bus operation suffered a loss of S$3.7 million in the quarter, narrowing from a loss of S$4.7 million for the same quarter last year, it said. Total revenue rose 10.9 per cent to S$247.2 million during the period.