SBS TRANSIT LTD (SGX:S61)
COMFORTDELGRO CORPORATION LTD (SGX:C52)
SBS Transit & ComfortDelGro - Government To Review Downtown Line Financing Framework
- The government will review the financing framework for Downtown Line (DTL) to minimise the commercial risk for its rail operator, SBS Transit (SGX:S61).
- SBS Transit has been incurring consistent losses on DTL operations, and we believe it could remain a drag for years without government intervention. This news serves as a positive catalyst for SBS Transit.
- Reiterate ADD, Target price: S$3.60.
Financing framework for Downtown Line to be reviewed
- Speaking in Parliament during the Ministry of Transport’s Committee of Supply Debate today, Transport Minister Mr. Ong Ye Kung said that the government will review the financing framework for the Downtown Line (DTL) to minimise the commercial risk for its rail operator, SBS Transit.
- Currently, DTL runs under the New Rail Financing Framework (NRFF) Version One, where SBS Transit pays a fixed licence fee to operate the line. Fare revenue risk, which varies depending on rail ridership, is borne by SBS Transit.
- Other MRT lines, including North-South, East-West, Circle and North East lines, run under the NRFF Version 2. While fare revenue risk is still borne by the rail operators, the updated frameworks allow for lower commercial volatility.
- Meanwhile, Thomson East-Coast Line, which is still being commissioned in various stages, is temporarily running on a separate framework, given that ridership has yet to stabilise in the initial stages of opening. Currently, the government bears revenue risk, and pays the operator a fee to run the rail line.
Downtown Line has been a drag for years
- Even prior to the COVID-19 outbreak, DTL has been a loss-making rail line for SBS Transit, as revenue generated from ridership has not been able to offset operation costs. We understand that SBS Transit’s DTL operations have been consistently loss-making (FY19: S$38.5m net loss), and the losses further widened in 2020 due to COVID-19.
- We believe COVID-19 brought structural changes to flexibility of work arrangements, and expect that in the new normal, there will be less daily travel to work. This could mean that DTL would remain loss-making for longer, without government intervention.
- In our view, it would be difficult for operators to maintain a high reliability of rail line operations while sustaining continuous losses.
Potential impact on SBS Transit and ComfortDelgro
- Assuming the fixed licence fee portion of the DTL is halved, we estimate 13%-16% upside to our FY21-23F net profit forecasts for SBS Transit. See SBS Transit Share Price; SBS Transit Target Price; SBS Transit Analyst Reports; SBS Transit Dividend History; SBS Transit Announcements; SBS Transit Latest News.
- As ComfortDelGro (SGX:C52) owns a 74% stake in SBS Transit, it could also potentially benefit from changes in the DTL financing framework. With the same assumption above, we estimate 3.6%-4.3% upside to our FY21-23F net profit forecasts for ComfortDelGro.
Reiterate ADD and Target price of S$3.60 (13.2x FY22F P/E) for SBS Transit.
- We have been flagging potential rail financing framework reform as a potential catalyst; this news could bode well for SBS Transit and ComfortDelGro. Read also the previous report: ComfortDelGro - CGS-CIMB Research 2021-02-15: On Road To Recovery But Volatility Remains.
- Reiterate ADD rating on both stocks as we expect earnings improvement in FY21F, helped by ridership recovery.
ONG Khang Chuen CFA
CGS-CIMB Research
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Darren ONG
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-03-05
SGX Stock
Analyst Report
3.600
SAME
3.600
1.700
SAME
1.700
