Transport sector outlook positive, but possible challenges lie ahead
- POSTED: 21 Aug 2014 20:44
- UPDATED: 21 Aug 2014 23:24
Public transport firms SMRT and ComfortDelGro have seen improved earnings thanks to recent bus and train fare increases as well as better cost management. But going forward, industry observers say business conditions remain challenging and revenue growth potential is limited.
SINGAPORE: The road ahead seems smoother for local public transport operators SMRT and ComfortDelGro. Both firms reported an increase in earnings for the three months ended in June.
SMRT's net profit jumped by about 37 per cent, while ComfortDelGro's net profit rose by almost 10 per cent over the same period. Analysts said this was largely due to recent fare increases and better management of operating expenses.
"Firstly, they have higher revenue helped by higher fares and recent fare increases. Secondly, they have also managed to keep operating expenses relatively in check. For instance, SMRT managed to get lower electricity and diesel costs, and that helped them. They also managed to get higher margins from their taxi business," noted Mr Andy Sim, vice president of equity research at DBS Bank.
Investors have also been warming up to both firms, boosted by prospects of change to public transport in Singapore. Since the start of this year, SMRT's share price has risen by about 34 per cent and ComfortDelGro's stock price has seen an increase of 26 per cent.
Mr Terence Wong, head of research at DMG & Partners Research, said: "Because people are now talking about the new business model with the government coming in, and expectations that the numbers for SMRT are turning around, the share price has also made a big surge over the past few months. ComfortDelGro, which has perennially been our preferred pick because of valuations, has also done fairly well."
However, industry watchers said there are possible road bumps ahead. Both SMRT and ComfortDelGro are expected to continue facing cost pressures, especially when it comes to labour and fuel. Furthermore, potential revenue upside is seen as limited.
Mr Daryl Liew, head of portfolio management at Reyl Singapore, explained: "It is heavily linked to population growth, for example. That has really been curtailed over the last year or so because of the move towards restricting foreigners coming in. And you have potential upside in terms of fare hikes, which I think will be measured and controlled. So from a fundamental standpoint, that is going to be capping your upside."
Industry watchers note that both operators have been diversifying their business to drive growth. ComfortDelGro recently expanded its bus business in the UK, while SMRT has been moving into the retail space.