ComfortDelGro's target price lowered to $1.54 by Barclays Research on high licensing charge

Stock Name: ComfortDelGro
Company Name: COMFORTDELGRO CORPORATION LTD

Research House: Barclays

Price Call: BUY

Target Price: 1.54

The Land Transport Authority (LTA) of Singapore has awarded the operating license of the country’s next urban line - Downtown Line (DTL) to SBS Transit - to SBS Transit, ComfortDelGro’s 75%-owned subsidiary.

But Barclays Capital Research says in a Aug 30 report that the licensing charge at $1.6 billion is too high.

“The DTL is approximately twice the size of the NEL by length as well as number of stations. We expect the NEL, currently running at approximately 80% utilisation, to generate $31 million operating profit in 2011E. Assuming a similar profitability, we expect the DTL to generate approximately $60 million operating profit at 80% utilization, which is still far off the average annual licensing charge of $84 million.”

Barclays Capital expects earnings to stay flat till 2014 and has cut its price target for ComfortDelGro to $1.54.

“To arrive at a fair DCF valuation of the shares, we have factored in the $1.6 billion licensing charge by assuming a one-off charge of $1.6 billion in 2023 -- the mid point of the licensed period. We expect the cash outflow relating to the DTL licensing charge will outweigh the additional operating cash flow from the DTL operation.”

However Barclays Capital adds that if the LTA defers the licensing charge of the DTL towards the end of the licensed period or revises down the licensing charge later on, the stock could see a valuation upgrade.