ComfortDelGro - Maybank Kim Eng 2021-03-09: Shaping Up

COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro - Shaping Up

The transport minister will review the financing framework for the loss-making Downtown Line (DTL), which is operated by 75%-owned SBS Transit (SGX:S61). This is a positive development for ComfortDelGro (SGX:C52) as its rail business is suffering losses due to lower-than-forecasted DTL ridership.
We think the Thomson-East Coast Line’s current arrangement of cost-plus model would be the most ideal scenario for ComfortDelGro.
Overall, maintain BUY on ComfortDelGro with a DCF-based target price (WACC: 8.2%, LTG: 1%) of S$1.88.

We continue to like ComfortDelGro as it is poised to enjoy operating leverage as domestic transport recovers. The stock is trading at 1.3x FY21E P/B, which is 2 standard deviation below historical mean.

Transport Minister Ong Ye Kung noted that SBS Transit bears significant commercial risks under New Rail Financing Framework (NRFF) version 1, in which the operator is paying a fixed licensing fee of S$750m over a 15-year period starting in 2019. DTL ridership has been weaker than projected, while operating costs have increased over time, resulting in DTL being loss-making.
The transport minister acknowledged that it is not ideal for a public transport business to be unstable and will review the current framework of DTL.

The North-South, East-West, Circle and North-East lines are under NRFF version 2 – the government has dropped its fixed fee financing framework, capped operators’ high profits but will cushion big losses to smooth out commercial volatility.
Meanwhile, the Thomson-East Coast Line (TEL) is on NRFF version 3, with the government bearing all revenue risk and granting a fee for the operator to run the line in the initial period when ridership is still unstable.
That said, TEL operator SMRT would be placed under NRFF version 2 once ridership stabilises. Nonetheless, transition to either NRFF 2 or 3 would still bode well for ComfortDelGro considering it’s making a loss.

Given the circuit breaker and work-from-home measures, DTL’s average daily ridership dropped 46% y-o-y to 257,000 in 2020, which is almost half of the authority’s initial forecast of 500,000.
We believe the authority is more likely to revise DTL’s framework to NRFF 3, as ridership has yet to stabilise and long-term impact of work-from-home measures remains uncertain.
In our view, transitioning to NRFF 3 would be the best outcome for ComfortDelGro as this would swing its railway business back into the black almost immediately.
All things equal, assuming DTL achieves breakeven through NRFF 3 conversion, this could potentially add S$0.04 (or 49%) to ComfortDelGro's FY21E earnings per share to S$0.13, we estimate.
See ComfortDelGro Share Price; ComfortDelGro Target Price; ComfortDelGro Analyst Reports; ComfortDelGro Dividend History; ComfortDelGro Announcements; ComfortDelGro Latest News.

Kareen Chan Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-03-09

SGX Stock Analyst Report BUY MAINTAIN BUY 1.880 SAME 1.880