ComfortDelGro - CIMB Research 2016-08-14: Completing transition to the GCM

ComfortDelGro - CIMB Research 2016-08-14: Completing transition to the GCM COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Completing transition to the GCM

  • CD’s 2Q/1H16 core net profit in line, at 26%/48% of our full-year forecast.
  • 2Q16 net profit rose 5% yoy, while revenue fell 1.4% yoy due to unfavourable FX.
  • Singapore bus, taxi, and automotive engineering businesses are key drivers for earnings growth. Singapore taxi hire-out rate remains healthy at close to 100%.
  • LTA has finished negotiations with incumbent operators; Singapore bus sector will be fully transitioned to government contracting model (GCM) from 1 Sep 2016.
  • Maintain Hold, with unchanged target price of S$2.91 (CY16 DCF, WACC: 7.0%) 

Net profit rose 5.3% yoy, revenue dipped 1.4% on adverse FX 

  • Group net profit rose 5.3% yoy to S$85m (US$63m) in 2Q16 (2Q15: S$81m). Revenue dipped 1.4% yoy to S$1.02bn (US$751m) in 2Q16 from S$1.04bn in 2Q15, only due to the adverse FX translation from the weaker pound, A$, and Rmb. 
  • Net cash position strengthened further to S$323m at end-2Q16 (end-2Q15: US$238m). CD declared an interim DPS of 4.25 Scts for 1H16 (1H15: 4.0 Scts), representing 57.8% payout ratio.

Growth led by Singapore bus and taxi, and automotive engineering 

  • Group EBIT increased S$2m or 1.7% yoy in 2Q16, led by growth in Singapore bus (+S$1.9m yoy on lower diesel cost), taxi (+S$2.5m yoy on higher rental from taxi replacement with still zero idling rate), automotive engineering (+S$4.5m yoy, 2Q15 marred by loss from diesel hedge), partly offset by lower overseas bus contribution (- S$5.1m yoy due mainly to adverse FX) and Singapore rail contribution (-S$1m due to the start-up cost for the Downtown Line stage III, expected to start operation in 1H17).

Government contracting model to take effect from 1 Sep 

  • Land Transport Authority (LTA) announced on 11 Aug that it has finished negotiations with the incumbent operators, including CD’s 75%-owned SBS Transit, for the transition of their remaining bus packages to the GCM. 
  • Under the GCM, operators will no longer bear fare risk, but receive a predetermined fee (indexed to several cost factors such as energy, labour, etc.) by LTA. 
  • According to LTA, post transition, SBS will operate 8 packages with durations of 2-10 years and an estimated total contract fees of S$5.32bn.

No upfront lump sum payment for bus, but effectively same 

  • Instead of selling the bus assets to LTA all at one go (under GCM, LTA is supposed to own all bus assets eventually), the incumbent operators will continue to carry the assets during the contract period and be compensated by an availability fee (lease payment) from LTA, which equals the buses’ depreciation cost. 
  • We view this newly disclosed payment arrangement for buses as financially similar to our previously assumed upfront lump sum payment, except for the more spread out capital recoupment.

Maintain Hold, for potentially increasing dividend 

  • We expect no special dividend to be paid out by CD. 
  • Nevertheless, investors can still hope for a gradually increasing dividend, in view of the anticipated improvement in cash flow under the new bus model as well as the already strong net cash position (S$323m at end-2Q16). 
  • We have factored in an incremental dividend payout ratio of 66-70% in FY16-18F, translating to yields of 3.6-4.0%, while highlighting the potential for more. 
  • Earnings-accretive M&As are a potential re-rating catalyst. 
  • FX fluctuations a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-08-14
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.910 Same 2.910