ComfortDelgro – OSK DMG

Positive On London Bus Acquisition

ComfortDelGro (CD) announced that it is acquiring part of FirstGroup’s London bus business for GBP57.5m (SGD109m). The purchase price implies an EV/EBITDA of 5.2x while CD currently trades at 6.1x FY13 EV/EBITDA. We are positive on the acquisition, and raise FY13/14 earnings by 2.9%/5.5%. Maintain BUY with higher TP of SGD2.20 (from SGD2.10 previously) based on DCF (WACC:9.0%; TGR: 2.5%).

Acquisition offers good value. We think the acquisition is value accretive to CD given that the purchase was made at 5.2x EV/EBITDA, cheaper than CD’s FY13 EV/EBITDA of 6.1x. Though CD’s UK/Ireland bus business is commanding lower operating margins of 7.8% compared to its Australia bus business’ 19%, management notes that this acquisition was opportunistic given improving bus operations in the UK.

A larger share of UK bus pie. Following this acquisition, CD’s UK bus market share would increase by 7ppt to 19%, sharing a joint second position with Arriva. Go-Ahead currently leads the UK bus market with a 24% market share.

Development of overseas business the way forward. As the domestic land transport market for rail and bus operators in Singapore remain challenging, we favour the growth potential of CD’s overseas businesses which accounts for 46% of operating profit and commands higher operating margins of 13.2% (versus 10% for Singapore). Management is targeting for overseas profit contribution to hit the 50% level. This London bus acquisition follows the Australia bus acquisition of Deanes Transit Group announced in early Aug 2012.

CD still offers value at current price level. At FY13 P/E of 15.5x, CD remains more attractive than SMRT’s 22.0x FY14 P/E (FYE Mar). We like CD for its widespread overseas network which allows it better overseas growth prospects – something we view as a strong advantage given the challenging domestic land transport market.

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