3 assets that boost ComfortDelgro's profit ego

Retail income will jump with 14,000sqm space.

According to Nomura, even though the short-term price momentum looks negative to any casual observer, it believes that the company has sufficient in-built growth drivers to maintain earnings growth across the forecast period.

Here's more from Nomura:

Driver #1: Downtown Line to contribute positively in FY14F/FY15F; value not yet reflected in stock price

By our estimates, the Downtown Line (DTL) will contribute positively after it starts operating in end-2013. We expect the DTL to significantly contribute to growth in FY14F/FY15F as the DTL commences operations and brings in revenues to offset the start-up costs currently depressing rail profits.

Overall, we expect the DTL to be profitable by the third full year of operations (i.e. FY16F).

There are three key things we like about the DTL that we believe will allow it to quickly contribute to earnings and cashflow: 1) we expect ramp-up in ridership to be quick as the DTL cuts through existing built-up residential and commercial areas; 2) we expect rental income to jump significantly as DTL’s retail space of 14,000sqm is more than 4x of the current North-East Line; 3) strong cashflow visibility as all incremental and replacement capex cost is to be borne by the Land Transport Authority (LTA), unlike the existing North East Line (NEL) where the operator may face uncertain large capex outlays.

In our view, the value of the DTL has yet to be fully reflected in the stock price as the street has either not factored in the profitability of the DTL in its forecasts or has underestimated it. This represents potential upside for early investors who are willing to take a positive view on DTL’s profitability.

Driver #2: Turnaround of Singapore bus segment to help drive growth in FY13F

We expect losses in the Singapore bus segment to shrink in FY13F thanks to receipt of subsidies – both from the new bus financing framework and from the Bus Service Enhancement Program (BSEP).

This is despite new quality standards set by the LTA – higher trip frequency (shorter waiting time) and lower load factor – that compresses profitability. Lower oil prices or well placed fuel hedges will also be instrumental in swinging segment profits into the black.

Driver #3: Stricter taxi regulations in Singapore to benefit market leader, potential for upside to numbers as impact not yet fully factored in

We are seeing a tighter regulatory environment in the Singapore taxi market as the Singapore government seeks to: 1) restrict total vehicular growth, including taxis and also 2) implement stricter taxi availability standards. The net effect of these measures will be to reduce competition in the sector and allow the market leader to grab a larger share of the pie.

ComfortDelgro, as the market leader, will be a key beneficiary, in our view. We have yet to fully factor in the benefits of these regulatory changes as details on the new taxi availability standards have yet to emerge. As such, this represents potential upside to our numbers.