Why startup losses from Downtown Line will hardly hit ComfortDelGro

Consensus is ''overly pessimistic''.

According to Maybank Kim Eng, they believe that consensus is overly pessimistic that CDG’s profits will be negatively impacted by startup related expenses for Downtown Line (DTL).

While agreeing that start up losses will lead to soft profit contribution from its rail operations, they believe that the startup losses will not be material to the group (FY12 Rail: 3% of group EBIT).

Here's more from Maybank Kim Eng:

Historical experience suggests that NEL turned profitable in its fifth year of operations. Given the operation synergies and lack of learning curve after a decade of operational experience, we expect DTL to break even much earlier than North East Line (NEL). 

With rising operating expenses and stagnating fares, transport operators in Singapore face a very challenging business environment.

In particular, recurring losses make their bus businesses unsustainable. While we have a negative near term view on Singapore’s fare based businesses, we argue that CDG’s diversification efforts have reduced their dependency on them. CDG’s exposure to Singapore’s fare based businesses is from its separately listed unit, SBS Transit (SBST) (75% owned by CDG).

With the group’s stake in SBST making up merely 8% of CDG’s market capitalization, we believe that the group’s exposure to this underperforming sector is limited.