ComfortDelGro - Transfer of BSEP buses

The transfer of buses under the Bus Service Enhancement Program (BSEP) to the Land Transport Authority (LTA) has no impact on ComfortDelGro’s (CDG) NTA and EPS, as 1) the BSEP bus assets and associated liabilities owing to the LTA that were parked on CDG’s book fully offset each other, and 2) earnings derived from the BSEP buses have always been merely a pass-through for CDG. Our FY15-17 core EPS estimates are kept intact.

We maintain Add on CDG, with an unchanged target price of S$3.42, based on CY15 DCF valuation. Key catalysts for CDG include earnings contribution of the Downtown Line (DTL) stage II & III and continued overseas expansions via M&As.

What Happened 
SBS Transit, the 75.2%-owned subsidiary that undertakes CDG’s Singapore public bus and rail operations, announced that it would transfer its BSEP buses to the LTA by end-15. To recap, the BSEP was a programme launched by the Singapore government in 2012 for the purposes of enhancing Singapore’s public bus services standard. As at 31 Jul 15, CDG has 427 BSEP buses comprising 278 single-deck buses and 149 double-deck buses. Based on the BSEP Agreement, LTA would transfer the legal titles of these BSEP buses to itself at a purchase consideration equal to the outstanding loans granted in respect of BSEP buses (S$164m as at 31 Jul 15).

What We Think 
1) The transfer of BSEP buses to LTA is a step towards the eventual launch of the Government Contracting Model (GCM) in Aug 16. The 427 BSEP buses to be transferred forms c.12% of the total 3,448 buses operated by SBS Transit as at 31 Dec 14. The remaining buses and related infrastructure, including bus depots, are expected to be transferred to the government by Aug 16.

2) The transfer of BSEP buses has no impact on CDG’s NTA and EPS as the BSEP buses and associated liabilities parked on CDG’s book fully offset each other; the income and expenses related the BSEP buses have always been a pass-through on CDG’s P&L.

3) Despite the non-impact on P&L, CDG’s net cash position would strengthen further from S$153m as at end-FY1Q15 to S$317 due to the removal of loans related to BSEP buses.


Technical Analysis
Daily Chart
What You Should Do 
Stay invested. Key catalysts include the earnings contributions of the DTL stage II (slated to commence operations by end-15) and stage III (by early 2017), as well as overseas M&As. We are looking to decent dividend yield of 3.1%/3.6% in FY15/16, before any special payout related to the prospective bus sales. (Read Report)

Source : CIMB Research

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