Reviewing Downtown Line Financing Framework

• The transport minister will review the financing framework for the loss-making Downtown Line (DTL), which is operated by 75%-owned SBS Transit (SGX:S61). This is a positive development for ComfortDelGro (SGX:C52) as its rail business is suffering losses due to lower-than-forecasted DTL ridership.
• We think the Thomson-East Coast Line’s current arrangement of cost-plus model would be the most ideal scenario for ComfortDelGro.
• Overall, maintain BUY on ComfortDelGro with a DCF-based target price (WACC: 8.2%, LTG: 1%) of S$1.88.
• We continue to like ComfortDelGro as it is poised to enjoy operating leverage as domestic transport recovers. The stock is trading at 1.3x FY21E P/B, which is 2 standard deviation below historical mean.

Government to Reassess Licensing Fee

• Transport Minister Ong Ye Kung noted that SBS Transit bears significant commercial risks under New Rail Financing Framework (NRFF) version 1, in which the operator is paying a fixed licensing fee of S$750m over a 15-year period starting in 2019. DTL ridership has been weaker than projected, while operating costs have increased over time, resulting in DTL being loss-making.
• The transport minister acknowledged that it is not ideal for a public transport business to be unstable and will review the current framework of DTL.

Positive Development Under Both Scenarios

• The North-South, East-West, Circle and North-East lines are under revenue risk and granting a fee for the operator to run the line in the initial period when ridership is still unstable.
• That said, TEL operator SMRT would be placed under NRFF version 2 once ridership stabilises. Nonetheless, transition to either NRFF 2 or 3 would still bode well for ComfortDelGro considering it’s making a loss.

New Rail Financing Framework (NRFF) Version 3: a More Likely Scenario for ComfortDelGro

• Given the circuit breaker and work-from-home measures, DTL’s average daily ridership dropped 46% y-o-y to 257,000 in 2020, which is almost half of the authority’s initial forecast of 500,000.
• We believe the authority is more likely to swing its railway business back into the black almost immediately.
• All things equal, assuming DTL achieves breakeven through NRFF 3 conversion, this could potentially add S$0.04 (or 49%) to ComfortDelGro's FY21E earnings per share to S$0.13, we estimate.

Source: Maybank Kim Eng Research - 9 Mar 2021