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:
. Key catalysts ahead include earnings contribution from DTL stage II &
III and continued overseas expansion via M&As
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
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
remains our preferred pick in Singapore’s land transportation sector. (Read Report)
Source : CIMB Research
Labels: ComfortDelgro, Transportation Sector