ComfortDelGro

DMG & Partners Research, June 12

WE hosted ComfortDelGro (CD) for a non-deal roadshow in Hong Kong. Investors' queries were addressed and key takeaways include: CD expects continued growth from overseas markets, a cost-plus model could boost domestic bus operations, a strong balance sheet is required to support merger and acquisition (M&A) activities, and Singapore Labour Foundation's (SLF) divestment of its stake is not a concern. Maintain "buy", with discounted cash flow-based target price of $2.25.

Expect continued growth from overseas markets. We think profit growth will stem from the UK market with the recent London bus acquisition increasing its fleet size by 41 per cent to 1,694. CD also sees opportunities in Australia as many bus operators there are still state-run.

It is mulling over expansion to new overseas markets, which will depend on government infrastructure and political stability in the region, and the project's ability to meet the mid-teen internal rate of return targets.

A cost-plus model could boost domestic bus operations. We think that the group could employ a cost-plus model, in line with the government's objective of balancing public transport affordability with operators' financial sustainability. If SBS Transit bus ops run on a cost-plus model with 7.7 per cent Ebit margins - based on UK's margins - its FY2012 operating profit would have reached $46.3 million instead of operating losses of $14.7 million, and FY2012 group earnings would have been 20 per cent higher.

Investors expressed concerns on an overly conservative balance sheet and requested a higher payout ratio. CD stresses that a strong balance sheet is needed for future M&A activities but does not rule out lifting its payout ratio in the future should cash flow strengthen further.

CD maintains that there are no changes to fundamentals following SLF's sell-down of its stake, as SLF had always been a passive stakeholder with one non-executive board seat. We think that SLF, which has a broad portfolio of investments which it reviews and rebalances on an ongoing basis, simply sees this period as an opportunistic time to exit.

BUY