Maybank Kim Eng Research 2015-07-02: ComfortDelgro - Shortlisted for London Overground, Limited Upside to FY17 EPS, Maintain SELL with SGD2.70 TP

Shortlisted for London Overground 

  • Shortlisted to operate London Overground from Nov 2016. 7.5 years + option for another two. 
  • We estimate FY17 EPS accretion of only 1.8%, if successful. 
  • Maintain SELL with SGD2.70 TP still at 17x FY16 EPS. Expect de-rating catalysts from growing threats to its taxi business. 

Shortlisted to run London Overground 

  • CDG is one of four operators shortlisted by the Transport for London (TfL) to run London Overground from Nov 2016 (note). The other candidates are Arriva Rail London, LoKeGo and HK’s MTR Corp. 
  • The concession is for an initial 7.5 years and can be extended by up to two years at TfL’s discretion. TfL intends to issue tender documents by end-July, with bids to be submitted by mid-October. 
  • The concession is currently held by London Overground Rail Operations Ltd (LOROL), a 50:50 JV between MTR Corp and Deutsche Bahn AG. The rail carries 585,000 customers a day. 

Positive development; threat to taxis still a concern 

  • We view this development positively as we expect synergies between London Overground and its bus operations in London. 
  • A rail concession could also allow CDG to put its 1Q15 net cash of SGD153m to work. 
  • Currently, the quantum of investment required is not clear. Assuming that MTR’s 50% share of LOROL’s FY13 profit of HKD18m/GBP1.5m is reflective of a normal profit, we estimate this contract could yield an annual GBP3m/SGD6.3m for CDG. 
  • Upside to our FY17 EPS is only 1.8%. 
  • Even though planned network expansion could provide further upside, we do not think it will be material. 
  • Furthermore, judging from the MTR JV’s strong track record, we believe the incumbent has a good chance in the upcoming tender. 
  • Hence, while we view CDG’s latest overseas venture positively, we caution against over-optimism. 
  • We continue to believe that the Street may be underestimating growing threats to its taxi business (note). 
  • Maintain SELL with our SGD2.70 TP still at 17x FY16 EPS or 0.5 SD above its 10-year average.
(Derrick Heng, CFA)