Land Transport Sector -

Crude oil price firmness to have limited earnings impact on land
transport companies
Since hitting a low in early 2007, crude oil prices have trended up. As seen from
the chart below, Brent Crude has risen from the low US$50s per barrel (in Jan
07) to the current level of close to US$70 per barrel. However, it should be
noted that the average price of US$63 YTD for 2007 is still lower than 2006’s
US$66.

CD has, in the early part of 2007, already hedged its fuel requirements for 1H07
(at as low as US$50/bbl). For 3Q07, Metroline (CD’s London bus operations)
fuel requirements are half hedged, whilst Singapore requirements are totally
unhedged. Overall, we believe CD could record lower fuel and energy expenses
of S$193.5m for FY07 (versus FY06’s S$196m), with increased volume partly
offsetting the positives from yoy lower crude oil prices.
SMRT, on the other hand, recorded a 21.8% yoy rise in electricity and diesel
costs for the period Jan-Mar07 (4QFY07) due to higher electricity prices. SMRT
has a one-year fixed price contract for electricity which will end in Sep 07.
Hence, we expect electricity costs to remain flat sequentially till then.
In the meantime, we continue to be positive on the Singapore land transport
sector. CD & SMRT are both BUYs. CD’s target price is S$2.91 and SMRT’s
is S$2.10 – these are based on the assumption that the land transport review by
the government will lead to only one operator in Singapore operating all the rail
and bus services. If one assumes the model of one operator running all rail
services in Singapore and another operator running all bus services, there will
be less cost synergies versus the former model and CD’s target price would be
a lower S$2.80 and SMRT’s S$1.91.
ComfortDelgro (CD SP)
BUY
Current Price: S$2.21
Target Price: S$2.91
SMRT Corp (MRT SP)
BUY
Current Price: S$1.91
Target Price: S$2.10