Will ComfortDelGro's Northeast Line suffer from a profit cap?

Its train segment is relatively young compared to SMRT’s.

With SMRT's train segment expecting to have its profit capped with the Land Transportation Authority (LTA)'s new rail financing network (NRFF), ComfortDelGro could breathe a sigh of relief as this would unlikely happen to its North-East Line (NEL).

According to UOB Kay Hian analyst Andrew Chow, the profit cap and collar policy set by the LTA on SMRT may not necessarily apply to ComfortDelGro.

"We think it is important to look at these terms based on the lifecycle of the various rail lines as well as the earnings history of the two incumbents," Chow claimed.

"If we reference the historical earnings of SMRT, the operator has enjoyed a sizeable rail profit margin of up to 29% since 1998," he added, stating that NEL, which has been in operation since June 2003, has yet to see its margins reach full potential.

DBS analyst Andy Sim said in previous reports that while the NRFF is expected to relieve SMRT of its future $2.8 billion capex woes, it would cap the company's future earnings.

Sim explained that with the risk-sharing mechanism, SMRT Trains is required to share profits through a tiered structure of up to 95% should EBIT margins exceed 5%.

"Meanwhile, LTA will share 50% of the shortfall if EBIT margins fall below 3.5%. This provides less volatility to SMRT’s future earnings, but it will also limit the upside potential," the DBS analyst furthered.

However, for Chow, this effect on SMRT should not be taken lock, stock, and barrel with regard to NEL.

"We believe the onerous profit cap and collar policy set by the LTA on SMRT may have been calibrated to reflect the ‘supernormal’ earnings SMRT has garnered in the past and may not necessarily apply to ComfortDelGro," he stressed.

It is anticipated that ComfortDelGro’s NRFF transition would likely be by the end of 2017. This is when Downtown Line phase three is due for completion and the line is anticipated to break even.