ComfortDelGro - Key takeaways from NDR

During the NDR that we hosted for ComfortDelGro (CDG) in Kuala Lumpur last week, management provided an update on the group’s recent developments and shared their view of the sector’s outlook. Key topics addressed included the on-going public bus reform, the development progress of the Downtown Line (DTL) stage II and stage III and the group’s growth strategies. We keep our FY15-17 EPS estimates intact and reiterate our Add call on CDG with an unchanged DCF-based target price of S$3.42 (WACC: 7.5%). Key catalysts ahead include earnings contribution from DTL stage II & III and continued overseas expansion via M&As.

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.


Technical Analysis
Daily Chart
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. (Read Report)

Source : CIMB Research

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