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CIMB’s Salivating At CDG’s $1.2b Asset Sales
Aspire, Hot Picks | 17 March 2015
By: Lim Si Jie
Articles (169) Profile

CIMB continues to remain “optimistic about the Singapore land transportation sector” and believes that the following developments will boost the sector’s outlook value in the medium to long term.

1. Enhanced Profit Margin And Capital Efficiency

The implementation of the government bus contracting model (effective from Sep 2016) should enhance capital efficiency and operating margins of the public transportation operators (PTOs).  Under the contracting model, the payments an operator receives are expected to be indexed or partially indexed to costs (energy, labour, etc.), allowing an operator to pass the rising costs on to the government.

2. Cost Savings From Lower Energy Prices

The PTOs should receive positive earnings impact from lower energy prices (both diesel and electricity) in 2015/2016.  Both ComfortDelGro (CDG) and SMRT are expected to benefit from low energy prices. Based on CIMB’s rough estimates, CDG could save $30 million – $50 million per annum on energy bills in CY15-16 and SMRT could save $20 million – $30 million per annum in view of the two operators’ energy cost mix and hedging tactics.

3. Continued Investment In Public Transport

The government continues to invest in public transport to consistently encourage the public to use it. Singapore will spend $26 billion over the next five years to improve the public transportation system, according to its 2015 budget statement.

Although the announced investment does not directly translate into higher net profits for PTOs in the short term, it bodes well for the long-term outlook of the Singapore public transportation sector. The investment will lead to a transportation system that is expected to be able to support a higher commuter ridership. It will then lead on to more projects for a PTO to bid for.

4. Tax Incentives To Expand Overseas

The government will be supporting internationalisation of Singapore companies by providing tax incentives through various tax schemes. CDG and SMRT are expected to benefit from the above tax incentives.

ComfortDelGro v.s. SMRT

Earnings Base

Source: CIMB

Evidently, with a global presence, CDG’s operating profit was mainly derived from overseas bus operations, local taxi operation and other businesses including engineering and inspection services (predominantly in Singapore).  SMRT’s 2014 operating profit was mainly derived from non-fare businesses located in Singapore, including rental and advertisement businesses.

Verdict: CDG has a more diversified earnings base.

Balance Sheet

As at 31 December 2014, CDG was in a net cash position of $89 million, compared to SMRT’s net debt of $662 million (net gearing: 0.79x). CDG’s balance sheet would be even stronger after the potential bus asset disposal worth an estimated $1.2 billion, compared to SMRT’s asset disposal of around $300 million.

CIMB’s states that CDG’s projected $1.2 billion worth of asset sales ($0.56 per CDG share) is contributed by its 75 percent-owned subsidiary, SBS Transit, in 2016. The move will further strengthen CDG’s net cash position ($89 million as at 31 December 14), providing $236 million of cash reserves ($0.11 per CDG share) after retiring all related liabilities.

Verdict: CDG has a stronger balance sheet.

Overseas Expansion Capabilities

With the freed capital from its bus asset disposal, CIMB feels that CDG has “better growth visibility than SMRT” in view of its successful and proven overseas growth strategy. Furthermore, SMRT has identified overseas expansion as a key growth strategy, so it could be subjected to higher execution risk in view of the lack of overseas experience.

Verdict: CDG has proven track record in overseas expansion.

Valuation And Recommendation

CDG : Add, TP of $3.42

CIMB recommends an ‘Add’ rating on CDG, with a target price of $3.42.

SMRT: Hold, TP of $1.80

SMRT is downgraded by CIMB from “an Add to a Hold”, with a lower target price of $1.80 (previously $1.97), due mainly to its less aggressive earnings projection beyond FY17.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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