Excerpts from analysts' report

roychen9.14williamtng4.14CIMB analysts: Roy Chen (left) & William Tng, CFA (right)

We expect three catalysts to drive ComfortDelGro’s (CDG) earnings growth and re-rate the stock: 1) the implementation of the government contracting model (GCM), 2) low energy prices, and 3) a turnaround of losses in the Downtown Line (DTL) operations.  

Our FY15-16 EPS estimates are raised by 10%-18%, to reflect the lower energy prices and reduced losses from DTL as later stages turn operational. Energy cost is the main FY15/16 positive, the GCM is a FY16/17 positive. Reiterate Add, with a higher DCF-based target price of S$3.42 (WACC: 7.5%).

Enhanced capital efficiency from asset disposal
Under the new GCM, the government will own all bus assets and related infrastructure, allowing CDG to unlock c.12% of its equity capital from the low-return Singapore bus business. In FY13, CDG’s Singapore public bus segment registered the lowest ROE of the group at 3.4%, vs. an average of 14.1% for CDG’s other businesses.

busesSBS Transit is expected to divest S$1.2 billion of assets in 2016 to the government. NextInsight file photoWe expect S$1.2bn worth of asset sales by SBS Transit (75%-owned subsidiary) in 2016, to bulk CDG’s net cash up to S$642m (move adds S$236m or 11cts per share after retiring all related liabilities).

CDG could deploy the freed capital to pursue a proven, successful overseas growth strategy or reward its investors with a special dividend. Either way, ROE will head up to justify higher valuations.

Positives of low energy cost  
Even without a contracted margin from the GCM (est. 8-10% OP margin effective Sep-16), CDG will enjoy earnings tailwinds from lower energy prices (FY15 net profit: +S$24m; FY16: +S$41m), even without factoring fare hikes. Post-GCM, energy costs will be a cost pass-through, negating any concerns of an eventual bounce in oil prices. The benefits are mostly from Singapore rail and bus (55% of energy consumption) as other bus operations are already energy-indexed.

Brent oil prices have halved to US$45-55 per barrel and Singapore’s electricity price has also declined by 35% to S$90/ MWh from 2014’s average. Our estimates already reflect the subdued positive as CDG has hedged 70%/15% of its FY15/FY16 energy consumption.

DTL2.15With just six stations, the SBS Transit-operated Downtown Line (in blue) has been loss-making owing to a lack of scale.DTL out of the dark soon   
Since the DTL commenced stage I operations (Dec-2013), a lack of scale means the DTL is loss-making.

We expect DTL breakeven to materialise between the commencement of stage II (1Q16) and stage III (2017) as a wider network effect will bring up total DTL ridership exponentially.

We believe that a new train contracting model has less benefits for CDG. 

Recent story: "COMFORTDELGRO to receive cash windfall for bus assets" -- StanChart


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