Higher cost of car ownership and rising tourist arrivals positive for land transport operators

COE prices surged in the latest tender, rising by 36.5 to 52.2% for motorcars and 21.8% for commercial vehicles. While the sharp jump is due to motor traders snapping up COEs before the introduction of a new and significantly smaller quota starting next month, prices could remain firm and even trend up due to a 28% reduction in supply from April till July. The SGD42001 price tag for an Open category COE, which is the highest, compared to the other 2 motorcar categories could be a sign of things to come.

Potential car buyers looking to the 2nd hand car market will also find that prices there have risen as well. According to the Straits Times, used car traders, sensing a spike in demand for 2nd hand cars have jacked up prices by SGD5000 to SGD7000.

We think that the higher cost of car ownership is positive for public land transport operators SMRT (Buy, TP: $2.08) and ComfortDelgro (Buy, TP: $1.83) as some potential buyers will decide to stick to public transport. This trend should continue if COE prices continue to trend up in the months ahead.

More significantly, land transport operators should benefit from an anticipated increase in tourist arrivals in the months ahead as operations from the 2 integrated resorts pick up momentum. Visitor arrivals for the month of February had risen 24.2% y-o-y to reach 857,000 visitors, which is the highest ever recorded in the month of February and the 3rd consecutive month of record visitors arrivals.

Currently, shares of SMRT are trading a mere 2% from our target price of $2.08 while that for ComfortDelgro remains at 15% below fair value. We favour ComfortDelgro given its higher upside potential to fair value and technical factors.

Shares of ComfortDelgro have been range bound for 8 months between $1.48-1.68 even as the trend for higher tourist arrivals is expected to continue and now higher car ownership could put off some potential car buyers. We think investors may have overlooked this stock. Technically, the stock has based out at $1.55 and we see upside bias to $1.73. If $1.73 clears as well, the next upside level is $1.84.