ComfortDelGro - OCBC Investment 2016-10-28: Singapore bus business unaffected by fare cut

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Singapore bus business unaffected by fare cut

• 4.2% fare cut effective 30 Dec.
• Rail fare revenue to fall by S$8.9m.
• Maintain BUY on slightly lower FV.

Reduction in NEL fares in addition to fare cut 

• The Public Transport Council of Singapore (PTC) announced yesterday that transport fares will be reduced by 4.2% from 30 Dec 16. 
• While the fare adjustment formula, which takes into account wages, core inflation and energy costs, yielded a maximum fare adjustment quantum of -5.7%, PTC has decided to transfer the rest of the -1.5% quantum to next year's fare review exercise, to spread out the impact of volatile energy prices over time. 
• In addition, fares for fully- underground lines [i.e North-East Line (NEL), Circle Line and Downtown Line (DTL)] will be reduced to the same level as above-ground options (i.e North-South and East-West Lines, LRT and buses). 
• Currently, fare differential exists as it was introduced in 2003 with the opening of NEL to take into account its higher operating costs. Going forward, all rail fares will adopt a purely distance-based approach, with fares based on shortest travel path. 
• ComfortDelGro’s (CDG) 75%-owned subsidiary, SBS Transit, operates NEL and DTL, which are both fully- underground rail lines.

Impact on CDG not that significant 

• With CDG’s bus business already under the new government contracting model, this fare cut will not affect its bus revenue, since all revenue risk from bus fares will be on LTA and not the operator. Hence, with CDG’s rail segment not as significant its bus segment, the fare reduction of 4.2% translates to a total decrease in fare revenue of only S$8.9m for CDG, compared to SMRT’s S$34.6m (rail revenue) and LTA’s S$35.6m (i.e. bus revenue). 
• CDG is also not required to contribute to the public transport fund since fares will be reduced. 
• In addition, we believe this fall in rail revenue will be mitigated with higher revenue as long as DTL phase 3 commences operations on time in FY17.

Lower FV from S$3.10 to S$3.09 

• As we factor in the fare reduction in FY17, our DCF-derived FV decreases slightly from S$3.10 to S$3.09. 
• With the recent weakness in share price, and supported by a decent 3.6% forward dividend yield, maintain BUY on CDG.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-10-28

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.09 Down 3.100