ComfortDelGro (CD SP) - DBS Research 2018-02-15: Similar NRFF Deal For SBSTransit, As Per SMRT

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro (CD SP) - Similar NRFF Deal For SBSTransit, As Per SMRT

• SBSTransit’s North-East MRT Line to transit to the New Rail Financing Framework effective 1 April 2018.
• Revenue and profitability risks sharing model; details not surprisingly similar to SMRT’s NRFF announced in Jun’16.
• Limited impact on our forecasts.
• Maintain HOLD.

What’s New 

Transition to the New Rail Financing Framework (NRFF).

• ComfortDelGro’s subsidiary, SBSTransit, announced that it has entered into agreement with the Land Transport Authority (LTA) for the sale of its rail operating assets in conjunction with the transition ito the New Rail Financing Framework (NRFF) for the North-East Line (NEL). 
• The NRFF is expected to be effective from 1 April 2018.

Salient points of the NRFF 

• We have summarised the key points of NRFF as follows: 
  1. Asset-light – SBSTransit will not be required to buy over the operating assets from LTA as opposed to the existing Licensing Operating Agreement. In addition, SBSTransit will be relieved of future capital expenditure. It will transfer its rail operating assets to the LTA at net book value, estimated at S$28.8m. This will be paid in cash in two tranches, with an initial 60% payable upfront and the remaining 40% over two years, subject to a condition survey.
  2. Shorter licence period – at 15 years, down from 30 years. LTA may extend for a further five years, subject to conditions.
  3. Licence Charge payment – a Licence Charge for the right to use the operating assets and operate the lines will be paid by SBST to the LTA.
  4. Fare Revenue Shortfall Sharing under Licence Charge – the fare revenue risk will be shared between SBST and the LTA via a revenue-sharing mechanism. For revenue falling between 2% and 6% of a target revenue (determined by the LTA), LTA will share 50% of the shortfall. For shortfall in revenue beyond 6%, LTA will bear 75% of it. LTA’s sharing of revenue is limited by the amount of Licence Charge payable by SBST.
  5. Profitability-risks sharing – There will be a Profit Cap and Collar mechanism. For EBIT margins above 5%, the excess will be shared via a tiered structure, up to a maximum of 95% for LTA. For EBIT margins below 3.5%, LTA will provide 50% of the shortfall.

Our views 

The NRFF is, not surprisingly, similar to SMRT’s deal. 

• The NRFF similar to SMRT’s deal for the North-South-East-West Line (NSEWL), the Circle Line (CCL), and the Bukit Panjang LRT (BPLRT) that was announced on 15 July 2016, and effective from 1 October 2016.

Limits revenue and profit volatility. 

• The NRFF provides more stability to SBSTransit’s revenue and profitability, though it limits the potential upside. That said, while we estimate that NEL is profitable and enjoys relatively strong margins, it has been subsidising the start-up costs of Downtown Line Stages 1-3, since 2013. 
• The timing of the NRFF also coincides with the full opening of DTL. Therefore, we estimate that SBSTransit’s overall rail operations’ profitability has been rather subdued.

No change to our forecasts, longer-term rail margins likely to be between 3-5%. 

• We currently have imputed a low profit contribution to ComfortDelGro’s rail operations in view of the ramp-up phase of DTL, coupled with expectations of the NRFF. As such, there are no significant changes to our forecasts. 
• We retain our HOLD recommendation on ComfortDelGro.

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2018-02-15

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.120 Same 2.12