• New assumptions for rail earnings
• Likely progressive payments for bus assets
• Reiterate BUY at current price levels

Incorporating NRFF’s impact on CDG’s rail lines

SMRT’s recently announced New Rail Financing Framework (NRFF) serves as a good reference point on how the NRFF for SBS Transit’s [75% owned by ComfortDelGro (CDG)] Northeast Line (NEL) and Sengkang-Punggol LRT (SPLRT) may be structured. CDG also operates the Downtown Line (DTL), which is already under the NRFF. DTL phase 1 and 2 (DTL 1 and 2) are already in operation while DTL 3 is targeted to start in FY17.

With the DTL still loss-making, we believe it is unlikely LTA will transit NEL to NRFF as CDG is currently using profits from NEL to support the start-up costs incurred to operate DTL 1 and 2. As we expect DTL to only breakeven after DTL 3 starts in FY17, we have assumed that NEL will only transit to NRFF from FY18 onwards.

Given the capped EBIT margin of 5% (fare and nonfare) for SMRT’s rail lines, we have also assumed the same EBIT margin cap for both NEL and DTL as we do not expect NRFF’s structures to differ significantly across different rail lines in Singapore.

LTA likely to pay for bus assets over time

Looking at the payment structure for LTA’s purchase of SMRT’s trains, we believe it is reasonable to assume that LTA is also likely to structure payment for CDG’s bus assets similarly, through progressive payments over five years, which matches the license term of the new bus government contracting model (GCM).

Post transition to GCM, CDG will become fully assetlight for both bus and rail operations in Singapore, which also improves its FCF outlook ahead. In addition, there could be a surprise upside if LTA decides to pay a lump sum for CDG’s bus assets, instead of our assumed progressive payments over five years.

Attractive on diversified revenue base and solid balance sheet

With the expected change to asset-light operating models (both rail and bus) and improved FCF outlook, we also change our valuation method from DDM-based to DCF-based (cost of equity: 6.9%, terminal growth: 1.0%) to better reflect CDG’s value. Consequently, on lower earnings forecasts but partially offset by higher FCF ahead, our FV drops from S$3.40 to S$3.21. Reiterate BUY.

Source: OCBC Research - 27 Jul 2016