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


You may also be interested in:

You have no rights to post comments

Counter NameLastChange
AEM Holdings3.300-
Avi-Tech Electronics0.250-0.005
Best World1.6900.010
Broadway Ind0.0920.002
China Sunsine0.3950.005
Delfi Limited1.1400.020
Food Empire1.090-
Fortress Minerals0.3100.010
Geo Energy Res0.275-0.005
GSS Energy0.028-
Hong Leong Finance2.4900.020
Hongkong Land (USD)3.190-
ISDN Holdings0.330-0.005
IX Biopharma0.043-
Jiutian Chemical0.025-
KSH Holdings0.290-
Leader Env0.0530.003
Medtecs Intl0.1410.005
Nordic Group0.400-
Oxley Holdings0.099-0.001
REX International0.167-0.001
Sinostar PEC0.135-
Southern Alliance Mining0.670-0.005
Straco Corp.0.470-0.015
Sunpower Group0.240-
The Trendlines0.0910.001
Totm Technologies0.038-
Uni-Asia Group0.905-0.030
Wilmar Intl3.610-
Yangzijiang Shipbldg1.4900.040

We have 1112 guests and no members online

rss_2 NextInsight - Latest News