The Singapore Land Transport Authority (LTA) had just announced the bidders for the 1st bus transport package. SMRT appeared to be particularly aggressive bidding at an extremely low contract price of $93.7m distantly far below the next lowest bid, Comfort Delgro (CDG)’s $125.2m. This represents more than 25% off from that of Comfort Delgro. Except for SMRT, all the transport companies’ bid clustered between $125m and $154m.
The question, of course, is SMRT’s bid suicidal? CDG has been in the bus operations in Singapore for many years and has been also operating in Australia, UK and China. Even with the wealth of experience, the SBS transit, which is a subsidiary of Comfort Delgro, has been incurring losses for 4 years running. The Singapore operation could only be marginally positive with other services like advertising. With that experience, surely CDG would be more realistic in the bid, building in sufficient but not exorbitant margin with due consideration of tight labour and changing fuel prices. With all the experience and past data, CDG has never achieved 25% net profit margin.
With the extremely low bidding price of SMRT, it is likely cut deep into the profit margin (if there is any). Perhaps, SMRT had made assumptions that oil price continue to be low at the current price of around $50-$60 per barrel and there is no problem with staffing. Furthermore, it has to be extremely efficient in its operation. Perhaps, SMRT is banking on the fact that bus assets would then be sold to the authority, and thus saving the huge depreciation cost that are to be incurred in the mobile assets. This would help to push up the operating margin. It is, however, too early to say how things pan out. If SMRT were to win in the tender, it is certainly a cut-throat competition for the land transport industry.
(Brennen Pak has been a share investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre. He is the author of the book Building Wealth Together Through Stocks.)