July 10, 2019

Singapore’s Transport and Finance Ministries are working on allocating a “temporary enhanced maintenance grant” to rail operators to cover their operating costs. These were previously not adequately covered by fare revisions. Rail-fare formulas as determined by the Public Transport Council will also be reviewed to “to reflect the increased operating cost to support the intensified maintenance”.

Details are not yet available but to factor in their potential short- and long-term impact on earnings and our DCF valuation, we raise our public transport service revenue growth assumptions (Fig 1). We believe the market will view the grants as recurring rather than exceptional items. Our FY20E core-profit forecasts are now slightly higher than FactSet consensus (Fig 2). Even on our new estimates , the stock trades near or above 1SD of its 3-year and 10-year P/E averages (Figs 3-4), suggesting expectations have been priced in.

Without more colour on the grants or fare-formula revisions, potential upside or downside to our estimates remains. Based on our sensitivity analysis (Fig 5), public transport services, locally and overseas, should become even more important than before for its value creation. Every 1% improvement in public transport revenues raises our TP by a similar 1%.

We attempt to capture the impact of Singapore’s coming rail-formula reforms as announced by the Transport Minister recently and raise our FY20/21E revenue by 9%/14% and core profits by 8%/13%. Our DCF-based (WACC 9.0%, LTG 1%) TP consequently climbs by 12% to SGD2.76. We maintain our HOLD. – MayBank Kim Eng

ComfortDelGro closed at: S$2.82