ComfortDelGro

Maybank Kim Eng Research, Sept 12

THE New South Wales (NSW) transport minister recently announced the award of new metropolitan bus service contracts. ComfortDelGro's (CDG) Australia bus unit CDCBus again won the contract to operate Region 4, which comprises the Blacktown, Rouse Hill, Castle Hill, Dural and Parramatta regions.

This effectively removes investors' earlier fears that CDG could lose the service contract to this route, which constitutes a third of its bus operations in Australia and involves around 500 buses.

Sydney Metropolitan's bus network is made up of 15 contract regions and managed by different operators. Contract Regions 6-9 are operated by the State Transit Authority (STA) while the other regions are run by Private Bus Operators (PBOs). Though the state-run operations account for only four of the 15 contract regions, they chalked up 76 per cent of the passenger journeys clocked in FY2012. With the majority of the bus transport services still managed by the state, we believe there is significant scope for the privatisation of bus routes in the future. This would represent a major revenue opportunity for private operators such as CDCBus ...

The NSW government has also stressed the importance of Sydney's bus network to its public transport infrastructure and aims to increase bus services to satisfy the growing demand for bus travel. Hence, with the expansion of the bus service market, we see room for CDG to increase its presence in the region.

Following the recent market correction, valuations for CDG are now below its historical average multiples of 16 times PE. With acquisition-led growth driving firm earnings over the coming quarters, we expect the stock's valuation to trade higher and keep our target price unchanged at $2.33, pegged at 18 times FY2014 forecast PE. Maintain "buy".

BUY