ComfortDelgro – DMG

DTL: short-term pain, long-term gain

Some pain before the gain in DTL profitability; lowering TP. Though we are positive on CD’s award of the DTL in the long run, we believe it will incur initial start up losses. We expect DTL to be loss making up to 2019, before turning profitable. We reduce our FY13 earnings forecast by 5%, and lower our DCF derived TP to S$1.70 (from S$1.81 previously). Maintain BUY. We continue to favour CD over SMRT for its more attractive valuation with FY12 P/E of 11.3x, as well as its overseas growth potential.

Recall that NEL took three years to breakeven. We believe it is normal for a train operator to incur losses during its initial running phase. NEL opened in 2003 but only became profitable in 2006. We expect ridership for DTL to take time to reach steady state, while additional staff may have to be trained before actual operations commence. CD will also have to pay a license charge which will add on to cost. These will be negative for earnings at the start.

Overall positive on operations. Expecting DTL to be profitable once operations stabilise. A key positive for DTL is its over 150k sqft of GFA, which is more than 4 times NEL’s. Rental income for NEL formed a significant 18% of CD’s FY10 rail operating profit so we expect rental from DTL to be a key contributor to rail profitability going forward as well. Jan – Aug 11 ridership growth for bus and rail continues to be strong at 6.7% and 14.8% YoY respectively.

DTL a booster to future earnings, but lower value in the short term. We lower our DCF derived TP (WACC 9.4%, terminal growth rate 1.5%) to S$1.70 as we factor in initial years of operation losses from DTL stages 1 – 3. However, we are positive on profit contribution for DTL in the longer term. CD has also indicated that it will maintain its dividend payout ratio of at least 50% of earnings. We continue to like CD for its (1) attractive valuations, trading at FY12 P/E of 11.3x (versus SMRT’s CY12 P/E of 16.0x), and (2) its overseas growth potential.

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