Why ComfortDelGro, SBS may see upside after train financing review
Transport plays ComfortDelGro and SBS Transit could benefit if the Downtown Line financing framework is changed, analysts noted.
- ComfortDelGro Corp (SGX: C52) share price hits S$1.71 per share
- SBS Transit (SGX: S61) advances 1.7% in two days to S$3.07
- The Singapore rail line, run by SBS, has been loss-making
- A reform of the rail financing framework could bode well for both firms
- Trade ComfortDelGro and SBS shares, long or short, with an IG account
ComfortDelGro, SBS shares on higher ground
Shares of land transport giant ComfortDelGro and its 75% owned subsidiary SBS Transit gained ground this week as the market grew upbeat about their rail business.
ComfortDelGro edged up another 0.6% to S$1.71 as of 09:03 SGT on Wednesday (10 March 2021), after rising 5.6% during the previous two days.
SBS shares were flat at S$3.07 in the same session, following a 1.7% increase across Monday and Tuesday.
Last Friday, the Singapore government said it will review the financing framework for the Downtown Line (DTL) to possibly minimise the commercial risk for the rail operator, SBS Transit.
The underground MRT line is currently on a fixed-fee framework, known as the New Rail Financing Framework (NRFF) 1. Under this structure, SBS paid a licence fee of about S$20 million in FY2020 to operate DTL, and bears the fare revenue risk, which varies depending on rail ridership.
What are the alternatives?
There is a possibility that the government could drop NRFF 1 for DTL and instead implement the risk-sharing model, or NRFF 2, The Business Times reported.
In the risk-sharing model, the government can protect the train line’s operator against excessive losses, reduce commercial volatility, but cap operators’ high profits. This is presently used for the North-South, East-West, Circle and North-East MRT Lines.
Another framework, NRFF 3, places the entire revenue risk on the government, which receives all fare revenues but pays the operator a fee to run the rail line. This is applied temporarily during the initial phase, when ridership is hard to predict.
Maybank’s Kareen Chan believes NRFF 3 will be ideal for DTL, as ridership has not stabilised and the long-term impact of work-from-home measures remains uncertain.
How might ComfortDelGro and SBS benefit?
ComfortDelGro’s railway business will swing back into the black ‘almost immediately’ with the third financing model, Chan opined.
‘All things equal, assuming DTL achieves breakeven through NRFF 3 conversion, this could add S$0.04 or 49% to FY2021 earnings-per-share estimates, to S$0.13,’ she said.
Meanwhile, DBS Group believes NRFF 2 will offer a more stable earnings profile for ComfortDelGro; it recommended ‘buy’ on ComfortDelGro’s stock with a S$1.99 target.
CIMB highlighted that even before the Covid-19 outbreak, SBS was incurring consistent losses on DTL because revenues were insufficient to offset operation costs.
The train line could remain a drag on SBS for years without government intervention, thus the framework review presents a positive catalyst, according to CIMB analysts. They reiterated ‘add’ and a S$3.60 target price on SBS shares.
Following the review, assuming the fixed licence fee portion of DTL is halved, CIMB estimated an upside of 13-16% to its FY2021-FY2023 net profit forecasts for SBS, and 3.6-4.3% upside to its forecasts for ComfortDelGro over the same period.
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