ComfortDelgro – OCBC
Key beneficiary of policy change
- Local bus operations a drag
- Good position to win tenders
- Preferred pick within sector
Core Singapore bus operations loss making since FY11
ComfortDelGro’s (CDG) core Singapore bus operations (operated via its 75%-owned subsidiary SBS Transit) has been a drag to its financial performance, raking in losses ranging from S$6-15m per year since FY11. During its recent 1Q14 results, CDG once again reported an operational loss of S$4.7m for its local bus business (excluding advertising and rental income), although this was an improvement from the S$5.4m loss suffered in 1Q13. The main issue is the lack of a commensurate increase in fare adjustments (last increase came in 2011 prior to the recent 3.2% increase implemented on 6 Apr 2014) despite heightened operating requirements from a growing population.
Brighter days ahead
Following LTA’s decision to implement a “Government gross cost contracting model”, we expect more significant improvements in its bus operations ahead, although the financial impact will only be felt in 2H16. As one of the Government’s objectives is to inject more competition into the industry, CDG comes under risk of losing its market share (~75%) since ~20% of existing buses will be put up for competitive tender in 2H14 (implementation will only take place in 2H16). Nevertheless, we believe CDG’s strong knowledge of the local operating environment and experience in operating a gross cost contracting model for its UK and Australia bus businesses will put it in a good stead to clinch the upcoming tenders.
CDG generated an operating margin of 8.4% and 19.2% for its UK and Australia bus businesses in FY13, respectively. LTA said that it has studied the London and Australian bus contracting models over the past two years, and hence we believe CDG will use these two countries as a benchmark, especially its UK operations, when it submits its tenders. Despite keeping our FY14-15 forecasts intact, we raise our FY16-18 PATMI projections by 4-12%, based on an 8% operating margin assumption for its Singapore bus operations. Consequently, our DDM-derived fair value is raised from S$2.30 to S$2.56. Maintain BUY. CDG remains as our preferred pick within the land transport sector.