ComfortDelgro – CIMB

Positive steps forward

With our FY16 EPS raised by 2.3% as the first wave of the government’s contracting model for buses kicks in, we raise our DCF-based target price (7.1% WACC), to reflect its better earnings visibility beyond FY16. Reduced capex and overall improvements in its cash-flow profile and balance sheet should allow CD to boost its overseas growth and/or dividend payouts. We maintain our Add rating, with catalysts expected from the above.

What Happened

The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems). Implementation starts only in 2H16.

What We Think

Better earnings, also cash flow and balance sheet. More details will be out next week with the announcement of the first bus package. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14. If its operating margins eventually mirror those of Australian and UK bus operators, which hover at 10-17%, CD’s bus EBIT margin as a whole could shift up to 10.5% in FY16. We are assuming 7% less capex for FY15 and 17% less for FY16, with asset disposals of c.S$80m in FY16. All these could lift its FY15-16 EPS, with a major impact from FY17 onwards.

What You Should Do

This shift to a cost-plus model, though not overwhelming for our estimates, has other implications. It would alter the cash outlays of the group, potentially propelling: 1) its overseas forays; and 2) dividend payouts. We believe that CD’s overseas ventures yield higher profit margins for the group than its local operations, as management intends to raise overseas revenue contributions to 60% of group revenue in 5-7 years’ time, from 40% currently. YTD net-cash inflows continue to enhance its balance sheet. We think that CD’s cash-flow-generation prowess and predictable capex give it room to increase gearing for M&As and/or commit to higher dividend payouts. We maintain our Add rating.

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