At last, ComfortDelGro’s (CDG) 75%-owned subsidiary, SBS Transit (SBST), has finalized the details with LTA on the transition of North-East Line and Sengkang and Punggol LRT systems (collectively termed “licensed systems”) to the new rail financing framework (NRFF). In our view, the details were not surprising given the similarities with the NRFF transition of NorthSouth East-West Line (NSEWL) back in 1 Oct 16.

Under the NRFF, SBST will surrender the existing license dated 15 Jan 03 (to operate NEL for an initial period of 30 years with possible extension of another 30 years), and be given a new NRFF license with a period of 15 years scheduled to commence on 1 Apr 18, with a possible extension of another five years. Under NRFF, SBST will no longer have to buy over the first set of operating assets from LTA, or any new operating assets going forward. Instead, LTA will purchase future operating assets, as well as buy over existing operating assets currently owned by SBST for ~S$29m.

In exchange for the right to operate the licensed systems, SBST will pay an annual license charge that provides for some revenue risks sharing as well as profit sharing with LTA. Notably, LTA will share between 85% and 95% of the incremental EBIT in excess of 5% EBIT margin. Our current assumptions for CDG’s rail business already factor in a maximum EBIT margin of 5.5%.

While we expect a possible kneejerk reaction to the downside later this morning, we believe it makes sense for clients to buy on dips on the back of a more stabilized taxi business outlook. Hence, we reiterate BUY with FV of S$2.25.

Source: OCBC Research - 15 Feb 2018