Brokers' take: DTL financing framework review to benefit SBS Transit, says CGS-CIMB

CGS-CIMB has reiterated its "add" call on SBS Transit with an unchanged target price of S$3.60, following Friday's news of the government's intention to review the financing framework for the Downtown Line (DTL).

In a report on Friday, CGS-CIMB said the news could bode well for both SBS Transit and ComfortDelGro, which it also maintained its "add" rating on with a S$1.70 target price.

Assuming the fixed licence fee portion of the DTL is halved, the brokerage is estimating a 13 to 16 per cent upside to its FY2021-23 net profit forecasts for SBS Transit. It also forecasts 3.6 to 4.3 per cent upside for ComfortDelGro's forward earnings over the same period, considering the company's 74 per cent stake in SBS Transit.

The projected earnings growth for both counters is expected to be helped by a recovery in overall ridership figures, in the event that the DTL's current fixed-fee framework is replaced with the risk-sharing model used for the North-South, East-West, Circle and North East lines.

Noting that the DTL has "been a drag (on SBS Transit) for years", CGS-CIMB said it expects the rail line to remain loss-making for longer without government intervention.

"Even prior to the Covid-19 outbreak, Downtown Line has been a loss-making rail line for SBS Transit as revenue generated from ridership has not been able to offset operation costs… We believe Covid-19 brought structural changes to flexibility of work arrangements, and expect that in the new normal, there will be less daily travel to work," said the brokerage.

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"In our view, it would be difficult for operators to maintain a high reliability of rail line operations while sustaining continuous losses," it added.

Shares of SBS Transit closed up 1 per cent higher at S$3.05 on Monday, while ComfortDelGro closed up 1.9 per cent at S$1.64.