Excerpts from analysts' report
CIMB analysts: Roy Chen & William Tng, CFA
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What Happened
The key takeaways from the NDR: 1) CDG views the bidding outcome of the first bus package positively, as the winning bid implies a reasonable margin which would set a reference point for future bus packages. Being a seasoned player in the more competitive overseas markets (UK, Australia), CDG is confident in its operating efficiency and hence, protecting its Singapore market share against foreign players. 2) The development of the DTL stage II and stage III is on track. Stage II is slated to commence operations in 1Q16 and Stage III in 1Q17.
The DTL is expected to achieve breakeven sometime between Stage II and Stage III, given the larger network effect and its coverage of developed areas. 3) CDG would continue pursuing growth in overseas markets through M&As, aiming to increase overseas profit contribution from currently below 50% to above 60%. Management said that Australia would have the most potential for M&As once it is open to private sector investment, as 80-90% of the buses there are operated by the state.
What We Think
We see plenty of catalysts that would drive the group’s earnings growth over the next 2-3 years. In particular, we believe that the share price has yet to factor in prospective earnings-accretive M&As, which would be backed by the group’s strong balance sheet (CDG was in a net cash position of S$153m at end-1Q15).
In light of the low-teens ROE of CDG’s existing overseas businesses, we estimate that every S$100m equity investment could potentially lead to S$13m-14m gain in earnings, equivalent to c.5% of FY14 net profit. What You Should Do We reiterate Add on CDG with an unchanged target price of S$3.42. CDG remains our preferred pick in Singapore’s land transportation sector.
