ComfortDelgro (KimEng)

Event

The winner of the two horse race for the Downtown Line (DTL) is ComfortDelgro. Our initial reaction is positive although we expect margins to be depressed from early 2013 onwards due to the higher licence fee and initial surge in operating costs, while profitability will only kick in fully when the line is fully operational in 2017. Over the long term however, we believe the DTL is a good strategic addition to the NEL as it will run through mature areas with high potential for ridership growth. Maintain BUY.

Our View

On the downside, margins are likely to be pressured by the higher licence fee and the higher operating costs of an underground line compared to the mostly aboveground NEL, but this will not feature prominently until 2013 when Stage 1 starts. Also, the licence fee (~$1.6b over 2013-2032) has both fixed and variable parts that should take into account ridership and operating costs.

We estimate total revenue over the 19 years should reach $3.5b, assuming 500k average daily ridership is hit in 2017, grows at 5% p.a. until 2021 and 2% thereafter. Taking SMRT’s rise in opex since Circle Line (CCL) opened as a rough gauge, we estimate an operating margin of about 9%, or roughly half the North-East Line’s 20% margin. The CCL has 31 stations over 35km vs the DTL’s 34 stations over 42km.

Strategically however, the DTL is a good catch because its 34 stations run through mature areas. We think the 500-700k projected average daily ridership from 2017 onward is achievable, as NEL already carries 417k daily and little cannibalisation is expected. Also, DTL will add 14k sq m of commercial space, more than 4 times currently available on the North-East Line. We have not yet included this in our forecasts.

Action & Recommendation

Maintain BUY with no change to FY11-12 forecasts but reduce FY13 forecast by 6.5%. Target price maintained at $1.58 (15x FY11 forecast).