ComfortDelGro Corporation - RHB Invest 2016-03-08: Takeaways From Investor Meetings

ComfortDelGro Corporation - RHB Invest 2016-03-08: Takeaways From Investor Meetings COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro Corporation - Takeaways From Investor Meetings 

  • We hosted ComfortDelGro (CD) for investor meetings in Kuala Lumpur and came back feeling optimistic of its ability to deliver c.30% growth in 2016, aided by upcoming positive changes to the regulatory landscape in Singapore. 
  • Maintain BUY and DCF-based SGD3.60 TP (WACC: 8%, TG: 1%, 20% upside). 
  • Investors appreciated CD’s ability to deliver predictable profit growth with low risk profile in an uncertain economic environment. 
  • Management foresees strong growth for its domestic bus, taxi and rail businesses with long-term growth aided by M&A, especially in Australia. 

Remain confident of our bus operating margin assumptions. 

  • Similar to Singapore’s Government Contracting Model (GCM) for bus operations, the fare revenue risk for CD’s UK and Australian bus operation remains with the government. 
  • However, unlike the asset light nature of Singapore’s GCM, CD has to own buses in the UK, and build its own bus depots in Australia. 
  • Given the asset-light nature of Singapore’s GCM, core bus operating margins should be below UK’s 10% margin. 
  • Including the advertising and rental revenue to core bus profits, we remain confident of CD achieving 7-8% net operating margin for its bus operations under GCM, which is expected to commence from Sep 2016. 

Deferred payment for bus asset sale cannot be ruled out. 

  • Amidst ongoing negotiations with the government, management did not provide clarity on the exact nature of payment terms for sale of its bus assets. However, it did highlight that a deferred payment instead of lump sum upfront payment by the government cannot be ruled out. 
  • Cash inflow of SGD710m from a bus assets sale, if paid in equal instalments over a 5-year period, lowers our DCF-based TP by only 3 cents to SGD3.57. 

M&A and Australia bus business could sustain long-term growth. 

  • CD will continue to pursue overseas M&A opportunities within the land transport sector, especially in markets where it already has a business presence. 
  • Among all overseas markets, management believes that the Australian bus business offers long-term growth potential, as less than a quarter of bus operations are currently run/managed by private players. 
  • Over the long term, management aims to achieve sustained profit contribution of 60% from overseas operations. Overseas businesses accounted for 45.6% of operating profit in 2015. 

Not overly concerned about foreign exchange movements. 

  • On queries related to impact on its profitability from the recent weakening of the GBP against the SGD, management stated that CD manages to match overseas revenue with costs, which acts as a natural foreign exchange hedge. 
  • While management does manage translation risks quite regularly, it does not hedge this exposure as it does not impact cash flows. This is mainly because CD does not remit overseas profits to Singapore. 
  • We reiterate our BUY call and DCF-derived SGD3.60 TP, which implies 19.7x FY16F P/E. 

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-08
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.60 Same 3.60