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Bus contracting model good news for SMRT, SBS Transit: analysts

Analysts say the new bus contracting model -- under which the Government will own all bus assets -- is good news for the two incumbent public transport operators SMRT and SBS Transit.

SINGAPORE: Analysts say the new bus contracting model -- under which the Government will own all bus assets -- is good news for the two incumbent public transport operators SMRT and SBS Transit.

With repair and maintenance costs making up a fifth of the operating costs, analysts say the new model will lift a load off the firms, enabling them to provide better service.

SBS Transit said the new model will have a major impact on the way it operates.

But it is optimistic that it can draw on its experience of running buses in London and Sydney under a similar tender regime.

SBS Transit CEO Gan Juay Kiat said: "This is one of the most significant developments in the local bus industry in recent times. We look forward to working closely with the authorities as we transition into the new operating environment."

Competition is expected to increase, but with the incumbents still guaranteed 80 per cent of the market share until 2022, analysts said it is good news for now.

Edison Chen, investment analyst at DMG & Partners Research, said: "Going forward, even if they lose this 20 per cent, in the early tender (that will be implemented) in 2016, they still have 80 per cent market share which guarantees that they will be able to negotiate at a price that will be able to at least make them money.

“So I definitely am positive about this news flow, and I believe that the market should react positively."

The other half of the public bus duopoly, SMRT, said that it is geared up to participate in the competitive tendering exercise.

SMRT in a statement said: "Regardless of the outcome for SMRT however, there will be transition issues that will need to be worked out through the Public Transport Tripartite Committee so that the interests of affected staff will be looked after.

“We will continue to place the highest priority on service excellence and operational performance in our existing bus operations."

Foreign players that could enter the fray are likely to be multinationals which have experience with bus contracting models.

Those foreign players include French firms Veolia and Keolis, British company Go Ahead, and Australia’s Tower Transit.

The share prices of the two incumbent transport firms have rallied in recent weeks amid market talk of possible changes that will improve their bottomlines.

SBS Transit’s shares are up 8.4 per cent, while SMRT’s shares are up 24 per cent year-to-date.

Gabriel Yap, executive chairman of GCP Global, said: "If you look at the current models, the profit deterioration in both companies has been very significant.

“For example, SBS Transit -- three years ago they were generating S$54 million in profits, and now profit has plunged to S$11 million as of last year. More importantly, this current model -- based on 2 per cent operating margins -- is definitely not sustainable."

According to the Land Transport Authority, contracts will not be won by the lowest bidder. Instead, transport companies will be evaluated on factors such as service levels and its track record.

Under the bus contracting model, analysts say companies can expect to earn an operating margin of around 8 to 10 per cent. 


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