Maintain Add. Key potential catalysts include earnings contribution from the operation of the Downtown Line (DTL) stage II and III as well as overseas expansion via M&As.
During his meeting with reporters at a preview of the new Circle Line trains on Monday 3 Aug, Mr. Lui announced a fare reduction of up to 1.9% by end-15, affecting public train and bus fares, to account for the lower fuel costs. The specific size of the cut will be determined by the Public Transport Council.
What We Think
The announced fare reduction is expected to have only a marginal impact on CDG’s profitability and valuation. Factoring in its 75% effective stake in SBS Transit, CDG’s Singapore public rail and bus arm, only c.4% of the group’s FY14 revenue was derived from rail fare collection and 15% from bus fare collection. The launch of the government contracting model (GCM) will further mitigate the fare cut’s negative impact on buses from Aug 16 onwards as under the new model the government will bear all the fare risk while the bus operators will be compensated with a fixed fee for the services rendered. We have included a sensitivity analysis overleaf to assess the potential impact on CDG’s core EPS estimates and target price. Even under the worst-case scenario (1.9% fare cut), our FY15-17 EPS estimates are only pushed down marginally.
What You Should Do
We reiterate our Add rating on CDG. Key potential catalysts include earnings contributions from the DTL stage II (slated to commence operations by end-15) and stage III (by early-2017) as well as overseas business expansion via M&As. CDG has a strong net cash position of S$317m (assuming the BSEP bus transfer is completed). We believe the company will pay decent dividend yields of 3.1% in FY15 and 3.5% in FY16 before handing out any special payout related to prospective bus asset sales. (Read Report)
Source : CIMB Research