ComfortDelGro Corporation - RHB Invest 2018-02-15: North East Line Transitions To NRFF

ComfortDelGro Corporation - RHB Invest 2018-02-15: North East Line Transitions To NRFF COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation - North East Line Transitions To NRFF

  • ComfortDelGro’s North East MRT line (NEL) will operate under the NRFF (New Rail Financing Framework) from Apr 2018. The transition to NRFF would enable it to operate NEL under an asset-light operating framework for next 15 years, i.e. this would save ComfortDelGro from a large capital outlay on the purchase and replacement of rail operating assets. However, the company will have to pay an undisclosed annual licence charge and see its EBIT margin for NEL being capped at 5%. 
  • We trim FY18F-20F earnings by 2-3% and adjust our Target Price to SGD1.98 (from SGD2.05, 2% downside) to account for NRFF.
  • Maintain NEUTRAL, as the stock lacks near term re-rating catalysts, and a dividend yield of 5% continues to provide support to its share price.



Revision to licence terms under the new rail financing framework (NRFF).

  • ComfortDelGro’s new licence term under NRFF will start in April for a period of 15 years, with an option to extend the term for another five years. Under the NRFF, it will no longer need to buy over or renew and replace NEL’s operating assets from the Land Transport Authority (LTA). 
  • On the contrary, the LTA will pay SGD28.8m to buy over NEL’s existing operating assets currently owned by ComfortDelGro. This will be payable in cash (60% payable upfront and the remaining 40% to be paid over two years). 
  • ComfortDelGro intends to use the proceeds to repay borrowings. 
  • The transition to NRFF will also require it to pay an undisclosed annual licence charge to the LTA over the licence period.


Revenue risk and profit-sharing terms. 

  • The licence charge structure under the NRFF provides for some sharing of revenue risks and profit-sharing between ComfortDelGro and the LTA. Under the “fare revenue shortfall sharing” mechanism, if actual revenue falls short of the target revenue by 2-6%, LTA will share 50% of the shortfall. However, if the shortfall between the actual revenue and the target revenue exceeds 6%, LTA will bear 75% of the incremental revenue shortfall beyond 6%. 
  • For profit-sharing, NEL’s EBIT margins will be exposed to a cap-and-collar mechanism. If the EBIT margin is lower than 3.5%, LTA will share 50% of the shortfall. However, if the EBIT margin exceeds the cap of 5%, the excess will be shared via a tiered structure, whereby 85% to 95% of the incremental EBIT above the 5% cap will be shared with LTA.


Assessment of decline in rail earnings. 

  • While ComfortDelGro has stopped disclosing the segmental revenue and operating profit for its rail business in Singapore, a quick back-of-the-envelope calculation suggests that capping of NEL’s EBIT margins at 5% under the NRFF could lower its EBIT by 3-4% over the licence period. 
  • We have factored in the realisation of cash from the sale of operating assets to the LTA over three years, and lowered our EBIT margin estimates for the public transport business accordingly.


NEUTRAL. 

  • The transition to NRFF further weakens its near-term earnings growth outlook, which continues to be weighed down by a weak taxi business in Singapore. 
  • We lower FY18F-20F earnings by 2-3% to account for the lower EBIT margin for NEL operations. 
  • Given the lack of re-rating catalysts, we maintain our NEUTRAL rating, with a revised DCF-derived Target Price of SGD1.98.




Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-15
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.98 Down 2.050



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