Comfortdelgro Corporation Ltd - OCBC Securities 2015-09-07: Small impact from potential fare cut.


Small impact from potential fare cut 

 Up to 1.9% in potential fare reduction 
 Impact likely marginal 
 Lower FV; maintain HOLD 

Potential fare cut in Singapore effective end-FY15 

  • Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. We highlight that this announcement of fare reduction by year-end came as a surprise to us, especially when the most recent fare hike of 2.8% only came into effect Apr 15. 
  • Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. 
  • With the transition to the new bus government contracting model (GCM) to commence 2H16, any fare adjustment thereafter will not impact revenue contribution from Singapore bus operations since revenue risk will be passed on to LTA. 

Minimal impact given diversified revenue base 

  • In our view, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Based on FY14 financials, CDG derived ~59% of its total revenue from Singapore. However, we estimate revenue contributions from rail and bus operations in Singapore only made up ~5% and 15-20% of CDG’s total revenue in FY14 respectively. 
  • Furthermore, with GCM to commence from 2H16, the fare cut will have no impact to CDG’s bus revenue contribution since LTA keeps all bus revenue collected while paying CDG a negotiated annual fee for operating public buses. 
  • With DTL phase 2 (DTL) slated to commence operations by year-end, a 1.9% fare reduction in FY16 will certainly be negative but unlikely to be significant for CDG. 

Slightly lower FV; maintain HOLD 

  • Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. 
  • Consequently, our DDM-derived FV drops slightly from S$3.07 to S$2.99. 
  • Maintain HOLD as we still like CDG for its stability and diversified revenue stream.

Eugene Chua | http://www.ocbcresearch.com/ OCBC Securities 2015-09-07
HOLD Maintain HOLD 2.99 Down 3.07