Update: SLK has won the contract to operate ferry services on the Brisbane River for up to 15 years, commencing November 2020. The contract currently operates 31 vessels. SLK’s operator role means it will not take fare box risk or vessel ownership. SLK has cited contract revenues at A$390m over the initial term of 10 years – although no margin has been disclosed, we would expect it to be sub-10%, in line with other like low risk contracts held by SLK.
Operational status: 1) We understand that Transit System Group (TSG) has largely continued to operate as per normal as an essential service in most geographies, due to the public transport nature of operations – TSG accounts for 80% of our forecast FY21 revenues post the Brisbane contract win; 2) Fraser Island accommodation and tours resumed on June 22; 3) Kangaroo Island services have returned to a two ferry operation, although most tours remained suspended until August; 4) dining cruises on Sydney Harbour appear to be still suspended; and 5) most other operations appear to be operating as normal.
Opportunities from here: 1) Although delayed by COVID-19, the privatisation for three regional bus contracts in Sydney (covering Sydney’s north-western suburbs, northern beaches and eastern suburbs) appears to be continuing, with Region 7 tender currently live and 8 and 9 to follow – SLK already operates regions 3 and 6 in Sydney; 2) although delayed by COVID-19, the Victorian Government intends to tender a contract to operate 52 metropolitan bus routes in Melbourne – press reports suggest the incumbent Transdev contract will not be renewed; 3) renewal of TSG’s current bus contract in Singapore could lead to other opportunities in that country; and 4) at the time of the acquisition of TSG, SLK cited a tender pipeline valued at A$3.6bn by 2025, which included potential bus contract tenders in Las Vegas, Denver, Phoenix, Tempe and West Covina in the US.
Changes to forecasts: Upgrade to FY21 and FY22 EPS forecasts by 2% and 3% respectively post Brisbane River contract win.
Investment view: Upgrade to BUY with revised DCF valuation of A$5.17 (prev. A$4.31) and price target of A$5.15 (prev. A$4.30) – we have rolled forward to our FY21 valuation. Our Buy call is supported by: 1) valuation; 2) growing recognition that earnings are now dominated by TSG, which is inherently defensive in nature due to a general absence of fare box risk and the cost-plus nature of contracts; 3) track record of contract wins; 4) opportunity pipeline in TSG; and 5) enhanced contract positioning with state governments due to combined ferry and bus expertise. Click here to read full report