ComfortDelGro - CIMB Research 2016-12-21: Overseas acquisition driving growth

ComfortDelGro - CIMB Research 2016-12-21: Overseas acquisition driving growth COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Overseas acquisition driving growth

  • ComfortDelGro has announced the acquisition of the remaining 49% stake in its Australian bus business, ComfortDelGro Cabcharge (CDC).
  • The acquisition price of A$186m (S$196m), based on 4.6x 2015 EBITDA, is palatable and should not be a stretch to the group’s balance sheet, in our view.
  • We raise our FY17-18F EPS by 3.9-5% to reflect the positive impact on the group’s net profit from the additional stake in CDC.
  • We maintain our Add call on ComfortDelGro, with a slightly higher target price of S$2.91, based on CY17F DCF (WACC: 7.0%).

Acquires the remaining 49% stake in Australian bus business 

  • ComfortDelGro announced on 21 Dec that it has entered into a Share Sale Agreement to acquire the remaining 49% stake in ComfortDelGro Cabcharge Pty Ltd (CDC) from its existing partner Cabcharge Australia Pty Ltd, for a cash consideration of A$186m (c.S$196m).

Background of ComfortDelGro Cabcharge (CDC) 

  • CDC was jointly formed by ComfortDelGro (51% stake) and Cabcharge (49%) in 2005.
  • Since then, CDC has grown to become one of the largest private bus operators in New South Wales and Victoria, operating contract scheduled bus, school bus, private contract and charter bus services. With its fleet of 1,712 buses, CDC undertakes ComfortDelGro’s entire Australia bus operations and is the group’s predominant income source in Australia. (Australia contributed 13.9% of the group’s operating profit in FY15).

Palatable acquisition price 

  • The valuation of the acquisition, based on 4.6x 2015 EBITDA of CDC, is broadly in line with the group’s historical acquisitions of bus businesses in Australia. We estimate that the purchase price of AS$186m (S$196m) translates to c.10x FY16F P/E, lower than the group’s current FY16F P/E of 17.3x. 
  • We think the reasons for the sale by Cabcharge are: 
    1. being primarily a taxi payment company, Cabcharge deems CDC a non-core asset, and 
    2. the sale consideration will help Cabcharge reduce its elevated gearing.

Positive financial impact 

  • We expect the acquisition (still subject to approval by the Australian Foreign Investment Review Board) to be concluded in 1Q17F. 
  • We raise our FY17F EPS by 3.9%, to reflect the 9-month contribution of the additional 49% stake in CDC and FY18F EPS by 5% to reflect a full year’s contribution. 
  • The purchase consideration of S$196m, to be financed by internal funds and borrowings, would not be a stretch to the group’s balance sheet, in our view, given the group’s net cash position of S$259m as at end-3Q16.

Largely stable outlook with potentially higher dividend 

  • We expect the group’s 2017 outlook to be underpinned by the likely higher Singapore bus margin under the bus contracting model and the commencement of the Downtown Line III operations (expected in Sep 17). 
  • We project higher dividend payout in FY16-18F at 66-70% (translating to yields of 3.8-4.6%), vs 64% in FY15. 
  • We maintain Add on ComfortDelGro and raise our target price to S$2.91, to reflect the value-accretive acquisition of the 49% stake in CDC. 
  • Stiffer competition from Uber/Grab is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-21
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.91 Up 2.860