Exclusion From The STI; Recovery Remains On Track
CD has been replaced from the STI with Emperador, in line with expectations. Rail ridership remained on track in Aug 22 as most COVID-19 measures have been removed. Taxi passenger demand continues to grow despite a shortage of taxi drivers. Although the Downtown Line’s transition would result in cost savings, CD is expected to face lower bus service revenue. We opine that there is some upside at current price levels. Maintain BUY with a lower SOTP-based target price of S$1.63.
• Rail ridership recovery on track. For Aug 22, ComfortDelGro Corporation’s (CD) rail ridership improved (+55.8% yoy, +5.0% mom), accounting for 86.2% of pre-pandemic levels (Aug 19). This is in line with expectations as we expect continued ridership growth given that most COVID-19 measures have been eased. This is also an improvement from Jul 22 when rail ridership only formed 79.9% of pre-pandemic levels. With record-high taxi and ride hailing surcharges, we also expect more commuters to shift to trains. We maintain our view that rail ridership will return to near pre-pandemic levels by 1Q23.
• Lower bus service revenue. As a recap, the Downtown Line (DTL) transitioned to the New Rail Financing Framework Version 2 (NRFF V2) as of Jan 22. Under NRFF V2, profits from the DTL would be capped at 5.0% EBIT margin, with the Land Transport Authority (LTA) sharing 85% of the spoils if exceeded, while 50% of any losses below 3.5% EBIT margin would be co-shared, limited to the annual licence charge. As DTL has been operating at a loss, this has resulted in annual cost savings of around S$20m, based on our estimates. SBS Transit has also extended five existing bus contracts by three years at a lower service rate, losing around S$34m operating profit per year starting 1 Sep 22. We have incorporated the lower service revenue into our estimates and reckon that the strong recovery in rail ridership and savings from the transition to NRFF V2 would help mitigate some of this loss.