Analysts from Maybank Kim Eng and RHB Group Research are maintaining their “buy” calls on ComfortDelGro (CDG) with target prices of $1.88 and $1.90 on the counter after Minister for Transport Ong Ye Kung announced that the government will be looking into the financing framework for the Downtown Line (DTL).
On March 5, Ong announced that the government could drop the current fee model for the DTL.
During the ministry’s Committee of Supply debate, Ong noted that SBS Transit, the operator of the DTL, bears significant commercial risks under the New Rail Financing Framework (NRFF) version 1, where it is paying a fixed licensing fee over a 15-year period starting in 2019.
SBS Transit is a subsidiary of CDG.
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To Maybank Kim Eng analyst Kareen Chan, the review of the financing framework is “a positive development” for CDG.
According to Chan, the group’s rail business is suffering from losses due to lower-than-forecasted ridership for the DTL, while operating costs have increased over time.
On the review, Chan says she thinks the DTL is most likely to take on the NRFF version 3 framework that is used by the Thomson-East Coast Line, as ridership on the DTL has yet to stabilise.
The impact of ridership figures due to the work-from-home (WFH) measures remains uncertain, she adds.
“In our view, transitioning to NRFF 3 would be the best outcome for CDG as this would swing its railway business back into the black almost immediately,” she says.
“All things equal, assuming DTL achieves breakeven through NRFF 3 conversion, this could potentially add 4 cents (or 49%) to FY2021 earnings per share (EPS) to 13 cents, we estimate.
CDG’s stock is currently trading at 1.3 times FY2021 price-to-book (P/B), which is 2 standard deviation below historical mean.
For RHB analyst Shekhar Jaiswal, the review of the DTL’s financing framework will be “helpful” for earnings due to the reduction of losses generated by the DTL.
He adds that a gradual pick-up in public transport ridership, as well as the stabilising of its Singapore taxi business should enable CDG to see q-o-q operational improvements and strong earnings recovery in FY2021.
“Despite recent share price performance uptick, valuations stay compelling amidst expectations of strong y-o-y earnings growth this year,” he says.
Like Maybank’s Chan, Jaiswal sees the transition to the Thomson-East Coast Line model as the “most ideal” as it would immediately stop the losses CDG is incurring to operate the DTL.
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That said, he says a transition to NRFF 2, which is being used for the North-South, East-West, Circle and North East Lines are “more likely” to happen.
“This is because it would sync DTL’s operating model with other lines that are currently being operated by CDG”.
“We assess that a breakeven for DTL in 2021 could translate into a 250-300 basis point uplift in EBIT margins. Everything else being equal, this would raise our 2021 estimate by 20-25%,” he says.
Shares in CDG closed 1 cent lower or 0.6% down at $1.69 on March 10.
