CGS-CIMB Research analysts Ong Khang Chuen and Darren Ong are maintaining their ‘add’ call for SBS Transit with an unchanged target price of $3.60 after Minister of Transport Ong Ye Kung said that the government will review the financing framework for the Downtown Line (DTL).
In a March 5 research note, the analysts highlighted that under the current framework, SBS pays a fixed license fee to operate the DTL and bears fare revenue risk which is dependent on ridership.
The DTL has been incurring losses since before Covid-19, as revenues generated from ridership have not been sufficient to cover operating expenses. Losses were exacerbated in 2020 after the pandemic, and the analysts believe that the shift to more flexible work arrangements will likely keep ridership levels low.
SEE:SBS Transit an 'add'; Comfort DelGro's net profit for FY2020 expected to be $51 million: CGS-CIMB
“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,” they say.
CGS-CIMB believes the financing framework reform will be a potential catalyst for SBS as well as ComfortDelgo.
“Assuming the fixed licence fee portion of the DTL is halved, we estimate 13%-16% upside to our FY2021 to FY2023 net profit forecasts for SBS,” the analysts say.
“As ComfortDelgro owns a 74% stake in SBS, 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 FY2021 to FY2023 net profit forecasts for ComfortDelgro,” they add.
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The analysts maintain their ‘add’ rating on SBS on expected earnings improvement in FY2021, helped by ridership recovery.
Shares in SBS closed 2 cents or 0.7% higher at $3.07, while shares in ComfortDelgro closed 6 cents or 3.7% higher at $1.70 on March 9.
