Category: ComfortDelgro
Land Transport – CIMB
Cool winds of change
With changes to the public bus system just announced by the government, both CD and SMRT can expect to eliminate operating losses in this segment of their business and improve their cash flow through lower capex and asset disposals. Conventional thinking favours CD (Add, target S$2.59) as the biggest winner, owing to its larger bus fleet and experience with cost-plus models, but we think that SMRT’s (upgraded to Add, target S$1.67) performance will also improve, as this development could serve as a prelude to a new rail financing framework. We upgrade the sector to Overweight from Underweight, with catalysts from more government initiatives and SMRT as our top pick.
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 only in 2H16. Initially, LTA will tender out three packages of bus services (out of a total of 12), starting with the first package in 2H14, for implementation in 2H16. The three packages will cover 20% of the existing buses. LTA will negotiate with the incumbents to run the remaining nine packages (80% of existing buses) under the contracting scheme, for durations of about five years when their Bus Service Operating Licences (BSOLs) expire on 31 Aug 16. After their expiry, more bus services will gradually be tendered out. The contracts will be valid for 5+2 years.
What We Think
The devil is in the detail. Details of the first bus package will be out next week. After 2022, all packages will be tendered out, with the aim of having at least 3-5 bus operators in the market. While some numbers regarding margins, the transfer of assets to the government and contracting are not out yet, we have made certain assumptions for CD and SMRT, to estimate the impact on their earnings, balance sheets and fleet-disposal plans to reflect these landmark changes.
Earnings upgrade; reduced capex and some disposal cash flows. Both Public Transport Operators (PTOs) should benefit from the transition to a more sustainable model, as this should ward off operating difficulties for them. CD, through SNS Transit, operates about 75% of Singapore’s 4,500 public buses, while SMRT runs the remaining 25%. 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, while SMRT Buses (also 19% of revenue) incurred an operating loss of S$28.4m in FY14. CD’s bus assets on its books are valued at c.S$820m and SMRT’s, at S$250m. While EBIT margins for both may not spike immediately, both certainly have advantages over any new competitor, given their extensive knowhow and track record in running public buses in Singapore.
What You Should Do
Sector upgraded to Overweight. We keep our Add rating for CD with a higher DCF-based target price (WACC 7.1%) after upgrading our earnings. It should be a clear beneficiary of the most significant development in the local bus industry in recent times. We upgrade SMRT to Add from Hold, given its greater earnings sensitivity to this move (see separate notes on CD and SMRT).
Land Transport – CIMB
Cool winds of change
With changes to the public bus system just announced by the government, both CD and SMRT can expect to eliminate operating losses in this segment of their business and improve their cash flow through lower capex and asset disposals. Conventional thinking favours CD (Add, target S$2.59) as the biggest winner, owing to its larger bus fleet and experience with cost-plus models, but we think that SMRT’s (upgraded to Add, target S$1.67) performance will also improve, as this development could serve as a prelude to a new rail financing framework. We upgrade the sector to Overweight from Underweight, with catalysts from more government initiatives and SMRT as our top pick.
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 only in 2H16. Initially, LTA will tender out three packages of bus services (out of a total of 12), starting with the first package in 2H14, for implementation in 2H16. The three packages will cover 20% of the existing buses. LTA will negotiate with the incumbents to run the remaining nine packages (80% of existing buses) under the contracting scheme, for durations of about five years when their Bus Service Operating Licences (BSOLs) expire on 31 Aug 16. After their expiry, more bus services will gradually be tendered out. The contracts will be valid for 5+2 years.
What We Think
The devil is in the detail. Details of the first bus package will be out next week. After 2022, all packages will be tendered out, with the aim of having at least 3-5 bus operators in the market. While some numbers regarding margins, the transfer of assets to the government and contracting are not out yet, we have made certain assumptions for CD and SMRT, to estimate the impact on their earnings, balance sheets and fleet-disposal plans to reflect these landmark changes.
Earnings upgrade; reduced capex and some disposal cash flows. Both Public Transport Operators (PTOs) should benefit from the transition to a more sustainable model, as this should ward off operating difficulties for them. CD, through SNS Transit, operates about 75% of Singapore’s 4,500 public buses, while SMRT runs the remaining 25%. 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, while SMRT Buses (also 19% of revenue) incurred an operating loss of S$28.4m in FY14. CD’s bus assets on its books are valued at c.S$820m and SMRT’s, at S$250m. While EBIT margins for both may not spike immediately, both certainly have advantages over any new competitor, given their extensive knowhow and track record in running public buses in Singapore.
What You Should Do
Sector upgraded to Overweight. We keep our Add rating for CD with a higher DCF-based target price (WACC 7.1%) after upgrading our earnings. It should be a clear beneficiary of the most significant development in the local bus industry in recent times. We upgrade SMRT to Add from Hold, given its greater earnings sensitivity to this move (see separate notes on CD and SMRT).
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.
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.
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.
Maintain BUY
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.