ComfortDelgro (KimEng)

Event

Using the North East Line’s (NEL) average daily ridership of 417k as a benchmark may be misleadingly low. We have upped our estimate of the Downtown Line’s (DTL) revenue contribution over the 19-year lease from $3.5b to $5b, while rental income could more than double from present levels. While most of these benefits will only kick in after 2015, the higher contributions suggest a more compelling long-term case for bagging the line. Also, we doubt Comfort’s dividend paying ability will be impaired, especially if rental income is carefully matched with the gradual ramp-up in start-up costs. Maintain BUY.

Our View

Using the NEL as a benchmark may be misleadingly low as it runs through new towns Punggol and Sengkang while the Buangkok and Woodleigh stations did not open until years after the line opened in 2003. Phase 1 will provide more connections downtown, Phase 2 will run from Bukit Panjang through the congested Bukit Timah corridor while Phase 3 will provide an East West Line alternative in the east.

Hence, our long term ridership estimates for the DTL have been too conservative. Our latest model now assumes far more aggressive double-digit growth of 10-25% in 2018-2020, up from 5% p.a. previously. We are particularly optimistic on Phases 2 and 3 to drive ridership growth. Our revised assumptions suggest total revenue of $5b over 19 years (previously $3.5b).

In addition, the rental of commercial space would add another element of upside. In 2010, ComfortDelgro earned less than 3% of EBIT from commercial rental. Based on 14,000 sq m of space and assuming SMRT’s achieved rental rates, we estimate the annualised rental income could more than double existing rental income from the existing $10m or so yearly.

Action & Recommendation

Maintain BUY on ComfortDelgro.