Excerpts from analyst's report
Daiwa Capital Markets analyst: Jame Osman
 ComfortDelGro owns 75% of SBS Transit, which is separately listed on SGX. Photo: publictransportsg.files.wordpress.comInitiation: shifting gears » Transition to an asset-light bus operating model positive for CDG » We forecast a revenue CAGR of 13.2% over 2014-17E for rail » Initiating coverage with Buy (1); DCF-based 12-month TP of SGD3.46 |
Investment case: We initiate coverage of ComfortDelGro (CDG) with a Buy (1) rating. In our view, the recent pull-back in its share price (down 11% since June) offers investors quality exposure to the defensive transport services sector. We also see upside potential from the progressive implementation of a new operating model for its Singapore bus segment, as well as strong potential for earnings growth opportunities in rail.
We believe the attractiveness of a new government contracting model (GCM) in CDG’s Singapore bus segment could be under-appreciated by investors. While it remains unclear exactly how CDG’s earnings could be impacted as the operating landscape evolves, we believe its free cash flow profile is likely to improve significantly (31.8% CAGR over 2014-17E) through capex avoidance, as all future bus assets will be purchased by the government.
We forecast a revenue CAGR of 13.2% over 2014-17E for CDG’s rail segment, driven by the scheduled opening of its Downtown Line Stages 2 and 3 in December 2015 and end-2017, respectively.
 "In the near term, we believe greater clarity over the GCM including details on the purchasing mechanism for the bus assets of operators, which we expect to happen before August 2016, would be a key share-price catalyst. We estimate the government could purchase bus assets potentially in a lump sum of SGD566m." -- Jame Osman (photo) |
Catalysts: In the near term, we believe greater clarity over the GCM including details on the purchasing mechanism for the bus assets of operators, which we expect to happen before August 2016, would be a key share-price catalyst. We estimate the government could purchase bus assets potentially in a lump sum of SGD566m.
In the medium term, we believe the award of rail network contracts, which could happen in 2017, could be another key catalyst. CDG currently has a 25% ridership market share, which could increase to 50% if it secures the upcoming Thomson-East Coast Line. This is, however, not in our forecasts, as the timing and implementation details are not clear.
Valuation: We adopt a DCF-based approach to value CDG’s shares, deriving a 12-month target price of SGD3.46. We value CDG with the following inputs: a WACC of 7.2%, comprising a 6% equity-risk premium, risk-free rate of 2.6% and a terminal FCF growth rate of 1.0%. Risks: The main risks to our call would be regulatory risks as well as an increase in labour costs
