Singapore Industrials 22 September 2015
ComfortDelGro Corp (CD SP) ComfortDel Gro C orp
Target price: SGD3.460 Share price (21 Sep): SGD2.870 | Up/downside: +20.6%
Initiation: shifting gears
Transition to an asset-light bus operating model positive for CDG Jame Osman (65) 6321 3092 We forecast a revenue CAGR of 13.2% over 2014-17E for rail [email protected] Initiating coverage with Buy (1); DCF-based 12-month TP of SGD3.46
Investment case: We initiate coverage of ComfortDelGro (CDG) with a Share price performance
Buy (1) rating. In our view, the recent pull-back in its share price (down 11% (SGD) (%) since June) offers investors quality exposure to the defensive transport 3.3 135 services sector. We also see upside potential from the progressive 3.0 125 implementation of a new operating model for its Singapore bus segment, 2.8 115 2.5 105 as well as strong potential for earnings growth opportunities in rail. 2.3 95 Sep-14 Dec-14 Mar-15 Jun-15 We believe the attractiveness of a new government contracting model ComfortDG (LHS) Relative to FSSTI (RHS) (GCM) in CDG’s Singapore bus segment could be under-appreciated by investors. While it remains unclear exactly how CDG’s earnings could be 12-month range 2.360-3.240 impacted as the operating landscape evolves, we believe its free cash flow Market cap (USDbn) 4.35 profile is likely to improve significantly (31.8% CAGR over 2014-17E) 3m avg daily turnover (USDm) 12.56 through capex avoidance, as all future bus assets will be purchased by the Shares outstanding (m) 2,139 Major shareholder BlackRock (7.0%) government. Financial summary (SGD) We forecast a revenue CAGR of 13.2% over 2014-17E for CDG’s rail Year to 31 Dec 15E 16E 17E segment, driven by the scheduled opening of its Downtown Line Stages 2 Revenue (m) 4,125 4,229 4,329 and 3 in December 2015 and end-2017, respectively. Operating profit (m) 446 513 583 Net profit (m) 292 335 382 Core EPS (fully-diluted) 0.136 0.157 0.178 Catalysts: In the near term, we believe greater clarity over the GCM EPS change (%) 2.9 15.0 13.9 including details on the purchasing mechanism for the bus assets of Daiwa vs Cons. EPS (%) (4.8) (3.4) (1.0) operators, which we expect to happen before August 2016, would be a key PER (x) 21.1 18.3 16.1 share-price catalyst. We estimate the government could purchase bus Dividend yield (%) 3.1 3.6 4.0 DPS 0.088 0.102 0.116 assets potentially in a lump sum of SGD566m. PBR (x) 2.7 2.5 2.4 EV/EBITDA (x) 8.4 7.6 6.8 In the medium term, we believe the award of rail network contracts, which ROE (%) 13.0 14.3 15.4 could happen in 2017, could be another key catalyst. CDG currently has a Source: FactSet, Daiwa forecasts 25% ridership market share, which could increase to 50% if it secures the upcoming Thomson-East Coast Line. This is, however, not in our forecasts, as the timing and implementation details are not clear.
Valuation: We adopt a DCF-based approach to value CDG’s shares, deriving a 12-month target price of SGD3.46. We value CDG with the following inputs: a WACC of 7.2%, comprising a 6% equity-risk premium, risk-free rate of 2.6% and a terminal FCF growth rate of 1.0%.
Risks: The main risks to our call would be regulatory risks as well as an increase in labour costs.
See important disclosures, including any required research certifications, beginning on page 36
ComfortDelGro Corp (CD SP): 22 September 2015
Table of contents
Shifting gears ...... 6 Investment thesis ...... 6 A diversified transport services provider ...... 6 Singapore ...... 8 UK/Ireland ...... 19 Australia ...... 21 China ...... 23 Other issues ...... 24 Financial analysis ...... 25 Valuation...... 29 Investment risks ...... 31 Shareholding structure and key management ...... 32
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How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook CDG: operating margin and net profit forecasts We forecast CDG’s net profit to rise at a CAGR of 10.5% (SGDm) over the 2014-17E period, driven mainly by: 1) an expected 400 14% improvement in the operating margin for its Singapore bus 350 13% segment following implementation of the GCM scheduled 300 12% for August 2016, as well as 2) a strong revenue contribution, a 13.2% CAGR, from its rail segment 250 11% following the expected opening of its DTL Stage 2 & 3 in 200 10% December 2015 and by end-2017, respectively. 150 9%
100 8% 2010 2011 2012 2013 2014 2015E 2016E 2017E Net profit (PATMI) (LHS) Operating margin (RHS) Source: Company, Daiwa forecasts
Valuation CDG: 12-month forward EV/EBITDA ratio (x)
CDG is trading currently at a 2015E EV/EBITDA of 8.4x, 12M forward EV/EBITDA (x ) which is more than 1SD above its past-10-year mean of 9
6.2x. We believe valuations appear reasonable mainly as: 8 +2 stdev 1) the outlook for the public transport industry has shifted 7 +1 stdev more favourably for operators, supported by positive regulatory policies, and 2) we forecast its free cash flow 6 Mean yield to sustainably increase to 8.2% in 2017E, which we 5 -1 stdev view as attractive. 4 -2 stdev In addition, we see further upside potential from the 3 awarding of contracts for new rail lines in the medium term. Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Bloomberg, Daiwa forecasts
Earnings revisions CDG: Bloomberg EPS consensus revisions
The Bloomberg-consensus EPS forecasts for 2015-16 (SGD) (SGD) have seen upward revisions of 1-7% over the past 12 0.170 3.3 0.165 months, due possibly to expectations of fuel and utilities 3.1 0.160 cost savings from the low oil price environment, offset by 0.155 2.9 forex concerns negatively impacting translated earnings 0.150 from its overseas operations in the UK and Australia. 0.145 2.7 0.140 2.5 0.135 0.130 2.3 Jul-15 Oct-14 Apr-15 Jan-15 Jun-15 Feb-15 Mar-15 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 May-15 FY15 E PS FY16 E PS Price
Source: Bloomberg
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Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Operating margin - Bus (%) 9.3 8.6 8.5 8.5 8.0 7.5 8.5 9.5 Operating margin - Rail (%) 19.0 18.8 9.3 2.9 3.9 7.0 5.0 8.0 Operating margin - Taxi (%) 12.1 12.5 12.5 12.2 11.8 12.0 12.5 12.5
Profit and loss (SGDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Bus 1,612 1,684 1,710 1,861 2,055 2,099 2,114 2,148 Taxi 982 1,039 1,130 1,198 1,284 1,321 1,365 1,411 Other Revenue 613 688 705 689 713 704 750 770 Total Revenue 3,207 3,411 3,545 3,748 4,051 4,125 4,229 4,329 Other income 0 0 0 0 0 0 0 0 COGS (2,452) (2,618) (2,732) (2,901) (3,170) (3,247) (3,350) (3,455) SG&A (15) (15) (14) (14) (16) (17) (17) (17) Other op.expenses (352) (379) (388) (407) (424) (416) (348) (274) Operating profit 388 399 412 426 442 446 513 583 Net-interest inc./(exp.) (29) (28) (23) (18) (12) (7) (7) (4) Assoc/forex/extraord./others 7 8 6 6 6 6 6 5 Pre-tax profit 366 379 396 414 436 445 512 583 Tax (78) (82) (86) (87) (92) (91) (105) (120) Min. int./pref. div./others (60) (62) (62) (64) (61) (62) (72) (82) Net profit (reported) 229 236 249 263 284 292 335 382 Net profit (adjusted) 229 236 249 263 284 292 335 382 EPS (reported)(SGD) 0.109 0.113 0.119 0.124 0.133 0.136 0.157 0.179 EPS (adjusted)(SGD) 0.109 0.113 0.119 0.124 0.133 0.136 0.157 0.179 EPS (adjusted fully-diluted)(SGD) 0.109 0.113 0.119 0.124 0.132 0.136 0.157 0.178 DPS (SGD) 0.055 0.060 0.064 0.070 0.083 0.088 0.102 0.116 EBIT 388 399 412 426 442 446 513 583 EBITDA 679 716 735 764 796 814 891 964
Cash flow (SGDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 366 379 396 414 436 445 512 583 Depreciation and amortisation 291 317 323 337 354 368 378 381 Tax paid (44) (44) (76) (78) (83) (91) (105) (120) Change in working capital (67) 99 20 6 26 (114) 8 8 Other operational CF items 46 27 24 18 2 2 2 (1) Cash flow from operations 593 778 687 698 735 611 795 852 Capex (538) (614) (527) (502) (517) (503) (423) (346) Net (acquisitions)/disposals 95 104 (1) (46) 16 0 0 0 Other investing CF items 42 23 17 16 16 13 12 13 Cash flow from investing (400) (487) (510) (532) (485) (490) (411) (333) Change in debt 70 (120) 87 120 (62) 0 0 0 Net share issues/(repurchases) 0 6 51 35 23 0 0 0 Dividends paid (140) (142) (163) (166) (198) (221) (251) (281) Other financing CF items (35) (34) (30) (27) (22) (18) (18) (18) Cash flow from financing (105) (290) (56) (38) (259) (239) (269) (299) Forex effect/others (7) 9 (3) 8 3 0 0 0 Change in cash 81 10 118 136 (5) (119) 115 220 Free cash flow 55 164 160 195 218 108 372 506 Source: FactSet, Daiwa forecasts
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Financial summary continued … Balance sheet (SGDm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 573 577 695 836 826 706 820 1,041 Inventory 59 57 58 71 72 74 75 77 Accounts receivable 103 133 129 111 117 119 122 125 Other current assets 266 213 213 222 224 312 398 480 Total current assets 1,001 979 1,094 1,240 1,239 1,211 1,416 1,723 Fixed assets 2,381 2,604 2,707 2,777 2,895 2,955 2,931 2,829 Goodwill & intangibles 533 553 569 687 686 680 675 669 Other non-current assets 466 453 476 381 411 411 411 411 Total assets 4,381 4,589 4,846 5,085 5,231 5,257 5,432 5,632 Short-term debt 188 198 96 218 243 243 243 243 Accounts payable 560 621 634 665 837 730 748 766 Other current liabilities 150 182 187 179 178 178 178 178 Total current liabilities 898 1,002 917 1,063 1,258 1,152 1,170 1,187 Long-term debt 523 434 608 590 494 494 494 494 Other non-current liabilities 613 680 684 638 640 640 640 640 Total liabilities 2,034 2,115 2,209 2,290 2,392 2,285 2,303 2,321 Share capital 566 569 585 623 646 646 646 646 Reserves/R.E./others 1,235 1,323 1,423 1,532 1,544 1,647 1,764 1,898 Shareholders' equity 1,801 1,892 2,008 2,155 2,190 2,293 2,411 2,545 Minority interests 547 582 629 640 649 679 718 766 Total equity & liabilities 4,381 4,589 4,846 5,085 5,231 5,257 5,432 5,632 EV 6,700 6,771 6,772 6,745 6,692 6,841 6,766 6,595 Net debt/(cash) 139 55 9 (28) (89) 31 (83) (303) BVPS (SGD) 0.862 0.905 0.955 1.014 1.024 1.072 1.127 1.189
Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 5.1 6.4 3.9 5.7 8.1 1.8 2.5 2.4 EBITDA (YoY) 7.9 5.4 2.7 3.9 4.2 2.3 9.4 8.2 Operating profit (YoY) 11.0 2.8 3.3 3.4 3.7 0.9 15.1 13.5 Net profit (YoY) 4.1 3.1 5.6 5.7 7.7 2.9 15.0 13.9 Core EPS (fully-diluted) (YoY) 4.0 3.0 5.3 4.4 6.9 2.9 15.0 13.9 Gross-profit margin 23.6 23.2 22.9 22.6 21.8 21.3 20.8 20.2 EBITDA margin 21.2 21.0 20.7 20.4 19.6 19.7 21.1 22.3 Operating-profit margin 12.1 11.7 11.6 11.4 10.9 10.8 12.1 13.5 Net profit margin 7.1 6.9 7.0 7.0 7.0 7.1 7.9 8.8 ROAE 13.1 12.8 12.8 12.6 13.1 13.0 14.3 15.4 ROAA 5.4 5.3 5.3 5.3 5.5 5.6 6.3 6.9 ROCE 13.2 13.0 12.8 12.3 12.3 12.2 13.6 14.7 ROIC 12.7 12.5 12.5 12.4 12.6 12.3 13.5 15.3 Net debt to equity 7.7 2.9 0.4 n.a. n.a. 1.4 n.a. n.a. Effective tax rate 21.3 21.5 21.6 21.0 21.2 20.5 20.5 20.5 Accounts receivable (days) 11.5 12.7 13.5 11.7 10.3 10.5 10.4 10.4 Current ratio (x) 1.1 1.0 1.2 1.2 1.0 1.1 1.2 1.5 Net interest cover (x) 13.3 14.5 18.2 23.9 37.8 64.8 74.1 132.1 Net dividend payout 50.2 53.2 53.8 56.3 62.1 64.5 65.0 65.0 Free cash flow yield 0.9 2.7 2.6 3.2 3.6 1.8 6.1 8.2 Source: FactSet, Daiwa forecasts
Company profile
ComfortDelGro is a multi-modal land transport services provider, operating a fleet of over 46,000 vehicles across several countries, including Singapore, UK, Australia and China. The company was formed following the merger of Comfort Group and DelGro Corporation in 2003.
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Shifting gears Investment thesis We initiate coverage of ComfortDelgro (CDG) with a Buy (1) rating and DCF-based 12- month target price of SGD3.46.
CDG is a multimodal land transport operator providing transportation services across the bus, rail and taxi segments, with a presence diversified across several markets including Singapore, the UK/Ireland, Australia, China, Vietnam and Malaysia.
Well-positioned to ride In Singapore, sweeping reform to the public bus sector, coupled with extensive plans for on the Singapore infrastructure development, underscore the government’s drive to encourage greater use Government’s drive of public transport services in the land-scarce city-state. This bodes well for CDG, which toward greater use of we view as well positioned to benefit from the change in operating landscape. public transport services Our positive investment thesis is premised on our beliefs that: 1) in Singapore, the government’s decision to overhaul the public bus sector will ultimately be positive for the current 2-player market, 2) CDG’s rail business could see earnings growth from the government’s plans to eventually double the rail network island-wide by 2030, and 3) CDG’s strengthening balance sheet could pave the way for further value-accretive acquisitions overseas, or facilitate a return of capital to shareholders in the near term.
Significant improvement While there exists some uncertainty around the timing and magnitude of the GCM’s impact in CDG’s free cash flow on the company’s earnings, the improvement to CDG’s free cash flow profile appears to be profile appears under- under-appreciated by investors, in our view. Based on our discussions with the company, appreciated CDG could see its capex spend decline by SGD180m annually as a result of capex avoidance on the renewal of its bus fleet in Singapore. We forecast CDG’s free cash flow to increase significantly at a 31.8% CAGR over 2014-17E, as future bus asset purchases will be borne by the government.
Meanwhile, even as we expect CDG’s Singapore rail business to see strong revenue growth (we forecast a CAGR of 13.2% over 2014-17E) driven by the commencement of operations for its Downtown Line, the government has outlined plans to grow the network significantly to 280km by 2020 (from 183km currently) and to 360km by 2030. The series of recent high-profile rail disruptions by the incumbent operator put CDG in good stead to secure some of these new lines over the longer term, in our view.
We believe the recent pull-back in CDG’s share price (down 11% since June) offers investors quality exposure to the defensive transport services sector, as well as the company’s diversified operations across segments and markets. CDG is trading currently at a 2015E EV/EBITDA of 8.4x, which is more than 1SD above its past-10-year mean of 6.2x.
In our view, CDG’s valuations are reasonable, as we believe its business is shifting gears, driven by strong revenue growth in its rail segment, a shift toward an asset-light bus operating model in Singapore and a favourable regulatory environment.
Further, we expect the company’s strengthening balance sheet (2014: net cash of SGD88.7m) and attractive free cash flow profile will provide management with the agility to seek value-accretive acquisitions overseas; or in its absence, potentially return the excess capital to shareholders.
A diversified transport services provider CDG has an established presence across several markets. Singapore continues to be the biggest revenue contributor to the business, at 59% of revenue (2014), followed by the UK/Ireland (25%), Australia (10%) and China (5%).
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CDG: revenue breakdown by geography (2014)
China Others 5.3% 0.3% Australia 10.2%
UK/Ireland 25.0% Singapore 59.2%
Source: Company
CDG’s bus, taxi and rail segments in total accounted for 87.3% of 2014 revenue and 73.1% of operating profit, respectively. Looking ahead, we expect the company to continue to focus on opportunities for business growth in these 3 key segments.
Amongst the segments, we see the most scope for an improvement in earnings quality in its Singapore bus segment, which is the largest contributor to revenue (51%), but less so at the operating profit level (37%), due mainly to the low margins at its Singapore bus segment. In addition, we believe the company’s rail segment (4.9% of 2014 revenue) will see strong revenue growth from the opening of its new lines. Given its growing expertise in this segment, management said it is keen to look at rail opportunities overseas.
CDG: revenue breakdown by business segment (2014) Inspection and testing services Others 2.7% 2.6% Rail 4.9% Automotive engineering services 7.5% Bus 50.7%
Tax i 31.7%
Source: Company
CDG: operating profit breakdown by business segment (2014) Others Inspection and testing 7.0% services 8.3% Rail Bus 1.7% 37.2%
Automotive engineering services 11.6%
Tax i 34.1% Source: Company
Diversified business CDG’s diversified base across business segments and markets enables the company to allows leveraging of best leverage best practices and economies of scale in competing against domestic operators. practices across For example, CDG’s experience in the bus markets of Australia and the UK, which have markets already adopted similar models to the proposed GCM in Singapore, give the company a
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competitive edge both in terms of structuring its operations as well as understanding the requirements of the local market, in our view.
Singapore Strong potential for long-term growth Singapore remains CDG’s biggest market, accounting for 59% of its overall revenue (2014). The company provides bus and rail services through listed subsidiary SBS Transit (SBST) (SBUS SP, SGD1.80, Not rated), and taxi services through its ComfortDelGro and CityCab brand. The company also provides vehicle inspection services through another listed subsidiary, VICOM (VICOM SP SGD5.86, Not rated).
CDG is one of 2 incumbents in the public scheduled bus and rail segments (the other key operator being SMRT [SMRT SP, SGD1.215, Not rated]), while it is the largest player (by fleet size) in the taxi market.
In our opinion, the underlying demand for public transport services is a function of 2 main factors: 1) its attractiveness vis-à-vis the associated costs (both explicit and implicit) of private vehicle ownership, which we believe remains prohibitively high in Singapore, and 2) overall population growth.
Singapore Land Transport: population growth trends (m) 6.0 6% 5% 5.5 4% 5.0 3% 2% 4.5 1% 4.0 0% (1%) 3.5 (2%)
3.0 (3%)
2000 2003 2006 2008 2009 2011 2014 2001 2002 2004 2005 2007 2010 2012 2013 Singapore population (LHS) % growth YoY (RHS)
Source: Singstats
The vehicle population in Singapore is closely regulated through the Certificate of Entitlement (COE) bidding system, implemented since May 1990, which gives vehicle owners the right to own and use a vehicle for a 10-year period.
Singapore Land Transport: vehicle growth trends (Cat A and Cat B vehicles) 650,000 10%
600,000 8%
550,000 6%
500,000 4%
450,000 2%
400,000 0%
350,000 (2%)
300,000 (4%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Cat A and B vehicles (LHS) % growth YoY (RHS)
Source: Land Transport Authority (LTA) Note: Cat A & B vehicles include cars but exclude goods vehicles & buses and motor-cycles
Low private vehicle The Singapore Government is clearly intent on limiting private vehicle growth in order to growth increases public avoid traffic congestion in the small city state. Since the announcement of the Land transport usage Transport Master Plan 2008 and 2013, the annual growth rate for vehicles was reduced from 3% to 1.5% from May 2009 to July 2012. This was further reduced to 0.5% from
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February 2013 to January 2015, and subsequently halved again from February 2015 to 0.25%.
At the same time, sweeping plans have been outlined by the government to invest in developing public transport infrastructure in the years ahead, to reduce the city state’s reliance on private transport over the next decade.
The government via regulatory bodies (Land Transport Authority, Public Transport Council etc.) has sought to revamp the public transport sector across all segments (bus, taxi, rail), as population growth over the past decade has also taken a toll on public infrastructure.
In terms of pricing, public bus and train fares in Singapore are calculated on a ‘distance fare’ basis (implemented since July 2010), thus allowing commuters to make transfers more seamlessly between train lines and bus routes without incurring additional fare charges.
Looking ahead, the road looks promising for CDG’s Singapore business, as public transport operators are well positioned to benefit from some of these policies, in our view, with the government continuing to champion the use of public transport services.
Bus: positive margin impact from the transition to a new model CDG is the largest public bus operator in Singapore with a fleet of 3,448 buses (as at end- 2014), operated by 75%-owned subsidiary SBS Transit (SBST). This includes 427 buses held by CDG for the government under the Bus Service Enhancement Program (BSEP) (launched in March 2012 to increase bus capacity and enhance service levels). As of 1H15, average daily bus ridership was 2.84m. Notably, bus average daily ridership (ADR) growth exceeded population growth over the 2011-2015 period at over 3% each year.
Singapore Bus: SBST annualised average daily ridership trends (m) 2.9 4.0% 3.5% 2.8 3.0% 2.7 2.5% 2.6 2.0% 1.5% 2.5 1.0% 2.4 0.5% 2.3 0.0% 2011 2012 2013 2014 2015
Average daily ridership ADR YoY growth Source: Company Note: 2015 data as of July
CDG’s Singapore bus segment accounts for a significant 38% (2014) of overall bus segment revenue (19% of total revenue). Despite this, its contribution to the bus segment’s operating profit has been much smaller as a result of a depressed operating margin of around 2% (after including advertising and rental income). This is due mainly to government-regulated pricing restricting operators from increasing fares despite cost increases over the years.
At present, there are only 2 key operators in the scheduled public bus market in Singapore – the other operator being SMRT. However, the landscape is set to change with the implementation of a new GCM for the public bus industry.
Regulated bus fare increases have been kept low to date In 2012, the Public Transport Council (PTC) established the Fare Review Mechanism Committee to ‘balance keeping public transport fares affordable with the long-term viability
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of the public transport operators (PTOs)’. Following a suspension in fare adjustments since then, in April 2014 the PTC finally announced its proposal to adjust bus and train fares upwards by 6.6% (3.2% from April 2014, 3.4% from April 2015). The latter increase scheduled for April 2015 was subsequently revised down to 2.8% (from 3.4%) after factoring in declining fuel prices.
Singapore Bus: actual fare increases from 2005-11 3%
2%
1%
0%
(1%)
(2%)
(3%)
(4%) 2005 2006 2007 2008 2009 2010 2011
Source: Fare Review Mechanism Committee Report Note: fare adjustments were suspended from 2012
From the increase in fare revenue, both operators will have to contribute a portion to the Public Transport Fund (which will be utilised to subsidise low-income households) – roughly 25% of the additional fare revenue for SBS Transit and 30% for SMRT.
Recently however, the transport minister has suggested that fares could be reduced by 1.9% in December 2015, taking into consideration the low fuel cost environment, as well as to coincide with the upcoming opening of CDG’s Downtown Line 2. We see a minimal impact on our forecasts, given that it is likely only to impact CDG’s Singapore bus revenue for 1H16, prior to the GCM’s implementation in Aug 2016. We have already factored the lower average ticket price growth into our 2016 revenue forecast.
Move to an ‘asset-light’ contract model will free SBST from its shackles More significantly, in May 2014, the Land Transport Authority (LTA) of Singapore announced policy changes which would see a major shake-up of the public bus system. It proposed a GCM, where the LTA would pay operators to operate bus services through competitive tenders, on a cost-plus basis. This would in turn be based on bus routes and service standards (bus frequency, operating hours, etc.) set by the LTA.
Bus ridership risks to be In this manner, the government will shoulder the burden of ridership and revenue risks, as borne by the well as assume ownership of all infrastructure and assets (buses, bus depots, bus government under the interchanges, fleet management systems, etc.). This would be implemented progressively GCM through the tendering of 12 packages.
Three of the 12 packages (each around 300-500 buses) are to be tendered out between 2014 and mid-2016. Incumbents CDG and SMRT will continue to operate the remaining 9 packages until August 2021.
The GCM follows in the footsteps of models already adopted in the overseas markets CDG operates bus services in – Australia and the UK. Comparatively, the Singapore version can be described as a ‘pure’ asset-light model, as operators will not own any bus assets or infrastructure. In Australia, operators own the bus depots, while in the UK, bus assets are fully owned by the operator.
The first of these packages (titled the ‘Bulim’ package) was called for tender in October 2014, and Tower Transit, a UK-based bus operator, was awarded the Bulim Package in May 2015. Its bid of SGD556m (over a 5-year contract period) was the third lowest among
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the bidding participants, indicating that the Singapore Government, while keen to promote competition, is focusing on factors beyond just cost.
The government will lease about 380 buses to Tower Transit, which is expected to begin operations some time in 2H16, when CDG and SMRT’s existing bus service operating licences expire (end-August 2016). In July 2015, the Bulim bus depot was handed over to Tower Transit for fitting out and training of its service staff. SBS currently operates 17 of the 26 services, with the remaining 9 are operated by SMRT – the incumbents are expected to transition the services over in 3 tranches from mid-2016.
Singapore Bus: shortlisted participants in Bulim Package tender Company Country Bid amount (SGD m) SMRT Corporation Singapore 453 RATP DEV Transdev Asia France 463 Tower Transit Group UK / Australia 556 Keolis SA France 559 Busways Group Australia 568 SBS Transit Singapore 600 Woodlands Transport Singapore 684 Go-Ahead Group UK 693
Source: LTA
The second package (‘Loyang’ package) was called for tender on 15 April for 25 service routes (22 existing, 3 new). Most recently, the tender for the Loyang package closed on 14 August, with 10 firms submitting bids. Tower Transit was notably absent in this round. The package is expected to be awarded in 4Q15.
We expect a margin improvement for CDG’s bus segment According to the company, it believes the first 3 packages will be a price discovery process, which will set an important precedent for incumbents CDG and SMRT to negotiate for the 9 packages (comprising the remaining 80% of the existing bus fleet) which they will continue to operate until 2021.
No longer subject to Given that the Singapore bus business has traditionally been a drag due to operating regulated fare pricing margins being depressed under the regulated pricing environment, we expect the move to the GCM to positively impact CDG’s Singapore bus segment operating margin. We expect operating margin could improve to levels similar to CDG’s London bus operations (8-10%).
At the same time, our base case assumes that the first 3 GCM packages will be awarded to new players in order to potentially spur competition and expand service quality options to commuters.
At this stage, it remains unclear how the financials of CDG could actually evolve as a result of the GCM, given that revenue will eventually be contractually pre-determined on a ‘cost- plus’ basis. To simplify this, we forecast a 20% decline in Singapore bus revenue from 2H16 onward, as this represents the share of bus routes transferred under the first 3 packages.
We estimate that the move to the GCM could increase our overall operating profit forecasts by 7-11% over 2016-17E, driven by an improvement in CDG’s Singapore bus segment operating margin to 10% in 2017E from around 1.6% currently.
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Singapore Bus: impact of GCM on segment operating forecasts SGD m 2014 2015E 2016E 2017E Current model Singapore bus revenues 777.4 848.8 883.1 918.7 YoY revenue growth 9.2% 4.0% 4.0% Operating profit margin 1.6% 1.6% 1.6% 1.6% Segment operating profit 12.4 13.6 14.1 14.7 Under proposed GCM Singapore bus revenues 777.4 848.8 794.75 734.98 YoY revenue growth 9.2% -6.4% -7.5% Operating profit margin 1.6% 1.6% 5.8% 10.0% Segment operating profit 12.4 13.6 46.1 73.5 Incremental operating profit - - 32.0 58.8 % increase to overall operating profit forecasts 6.6% 11.2% Assumptions First 3 GCM packages are not won by either incumbent 20% decline in revenues
Source: Company, Daiwa estimates
Sale of bus assets will free up significant capital Under the GCM, we also expect that the government will acquire all related bus assets from CDG prior to its implementation in August 2016. At present, this includes around 3,021 of its existing fleet of 3,448 buses (excluding 427 buses under the Bus Service Enhancement Program).
Overall, we estimate that the proceeds from the potential sale of CDG’s bus assets could amount to around SGD566m. In deriving our estimate, we use SBS Transit’s disclosed segmental bus assets and liabilities, and assume that the transaction will be executed at net book value. We exclude the proportion of bus assets held by SBST as part of the BSEP, which we estimate to be around SGD118m.
Singapore Bus: proceeds from the potential government acquisition of bus assets SGDm Amount SBST segmental bus assets (2014) 1,095 SBST segmental bus liabilities (2014) 411 NBV 684 Less: BSEP buses 118 Total potential net proceeds 566 Per share (SGD) 0.27 SBST accumulated profit (2014) 253 Potential payout at CDG level 0.12
Source: Company, Daiwa estimates
Following the asset sale, a natural question would be: what plans would CDG have with the excess capital in hand?
With the move to an “asset-light” GCM focusing on operating efficiency, it is unlikely that this capital could be reallocated elsewhere (its train assets are owned by the government). As a result, we believe SBST is likely to return this to shareholders. However, we observe that SBST’s existing balance sheet constraints (shareholder’s equity of SGD310.1m [2014]) could limit its ability to pay a special dividend, which would see the full proceeds returned.
Potential payout of Hence, we estimate that SBST could return up to around SGD253m (SGD0.12/share) of SGD0.12/share from bus the proceeds (based on its 2014 accumulated profits). The other scenario that could occur asset sale proceeds to enable the full return of capital would be if CDG were to acquire the remaining stake in SBST and privatise the company.
However, based on our discussions with the company, and given the lack of details surrounding the asset sale at this point (including issues such as the timeline, purchase mechanism of the assets to be acquired, operating requirements, etc), we have not incorporated this potential into our forecasts.
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Further announcements from the regulator could positively impact CDG’s share price performance, in our view.
Forecasts and assumptions Overall, we forecast Singapore bus revenue to decline by 20% from August 2016, as our base case assumes that the first 3 GCM packages will be awarded to new players in order to initiate competition and expand service quality options to commuters.
In addition, we expect CDG’s Singapore bus operating margin to improve to levels of around 10% by 2017E, using its London operations as a precedent for how the Singapore bus landscape could evolve.
CDG: Singapore bus segment revenue forecasts (SGDm) 900 15%
800 10%
700 5%
600 0%
500 (5%)
400 (10%) 2010 2011 2012 2013 2014 2015E 2016E 2017E Singapore bus revenue (LHS) YoY growth (RHS)
Source: Company, Daiwa forecasts
Taxi: still room for growth Largest Singapore taxi With a taxi fleet of 16,933 (12,608 Comfort and 4,325 CityCab) vehicles (end-2014), operator, with 59% representing around 59% of the total taxi population of around 28,000 taxis, CDG is the market share biggest taxi operator in Singapore. Granted the Taxi Operator Licence (TOL) from the Land Transport Authority (LTA) in 1970, CDG was also the first operator in the market.
Since the deregulation of the taxi industry in 2002, several other operators have since entered the market. However, taxi operators have struggled to meet LTA’s service requirements, with one operator eventually exiting the market in August 2013 (Smart Taxi was subsequently acquired by Trans-Cab), as it was unable to meet the minimum fleet of 800 taxis, reducing the number of taxi operators to 6 (excluding individual yellow-top taxis).
Singapore taxi: list of taxi operators (as of Dec-2014) Taxi company TOLcommenced Fleet size Comfort Transportation 1970 12,608 CityCab 1995 4,325 SMRT Taxis 2003 3,722 Trans-Cab 2003 4,859 Premier Taxis 2003 2,148 Prime 2007 896 Individual yellow-top taxis NA 178 28,736
Source: LTA
Under the taxi availability standard set by the regulator, 85% of taxis are required to be on the roads for a minimum of 250km a day. Only operators that meet these service standards are permitted to expand their taxi fleets. Notably, CDG was the only operator allowed to expand its fleet in 1H15, as it passed all the LTA standard requirements.
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Singapore Taxi: taxi population growth 30,000 6% 5% 25,000 4% 20,000 3% 2% 15,000 1% 10,000 0% (1%) 5,000 (2%) 0 (3%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Comfort/CityCab SMRT Trans-Cab Premier Others YoY growth (RHS) Source: LTA
2% cap on taxi fleet In addition to mandating operators to meet strict service standards, the LTA imposed a 2% growth benefits CDG the cap on fleet growth in August 2012, signalling its clear intent to limit the growth of the taxi most population, and encourage commuters to switch to more efficient forms of public transport, like buses and rail services. The 2% limit also hinders smaller operators from achieving the economies of scale already present in CDG’s taxis operations.
We expect minimal impact from private car hire booking apps CDG derives its Singapore taxi revenue mainly through rental income of its taxis to qualified drivers, with only a marginal 1.5% of its revenue coming from taxi bookings through its online system (phone, app bookings).
According to the company, CDG’s fleet continues to be close to 100% rented out, and it does not expect this to change, mainly as it does not foresee the overall supply of taxis increasing significantly in the long term as the government is keen to control the overall vehicle population.
Despite concerns of growing competition from independent third-party booking apps, such as Uber and GrabCar, CDG recorded 35.6m booked jobs in 2014 (up 10% YoY), highlighting that the underlying demand for its taxi services remains strong.
In our view, private car-hire booking services mainly fill a shortfall caused by the undersupply of licensed taxis. Given that there are only around 28,000 taxis in Singapore in total (serving the 5.6m population), this is clearly insufficient to meet demand, particularly during peak hours, when getting a taxi is a ubiquitous problem.
During off-peak periods where demand is moderated, licenced taxis have a clear advantage over private car-hire services – commuters are able to hail taxis on the street without having to wait for a booking. According to the company, street hails account for around 80% of taxi services rendered.
Forecasts and assumptions We forecast CDG to continue to dominate the taxi industry in Singapore, as it could remain one of the few players to meet the LTA’s QoS standards, allowing it to grow its fleet conservatively and benefit further from economies of scale. As fleet renewal occurs progressively (statutory replacement is 8 years), we expect rental rates to grow at a pace similar to that observed in prior years.
With CDG expanding its fleet annually at an average rate of 1.5%, we expect it to continue at this conservative pace, as the regulator is likely to continue to closely control overall taxi population growth in the longer term.
As CDG derives its Singapore taxi revenue through the rental of its vehicles to licenced drivers, we believe it will be able to sustain its fleet rental at levels close to 100% – we
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expect minimal impact to Singapore taxi revenue from the competition of private hire transport services offered by the likes of Uber and GrabCar. Overall, we forecast a revenue CAGR of 3.5% for the Singapore taxi segment over the 2014-17E period.
CDG: Singapore taxi segment revenue forecasts (SGDm) 1,100 12%
1,000 10% 900 8% 800 6% 700 4% 600 500 2% 400 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Singapore taxi revenue (LHS) YoY growth (RHS)
Source: Company, Daiwa forecasts
CDG: Singapore taxi segment key assumptions 2014 2015E 2016E 2017E Singapore taxi key assumptions Fleet size 16,855.0 17,108 17,364 17,625 Fleet growth (% YoY) 1.5% 1.5% 1.5% 1.5% Average daily rental rate (SGD) implied 156.2 159.4 162.6 165.8 Rental rate growth (%) 6.1% 2.0% 2.0% 2.0% Singapore taxi revenue 961.2 995.1 1,030.3 1,066.6
Source: Company, Daiwa forecasts
Rail: expanding its network CDG operates 2 LRT In our view, CDG’s rail segment presents the biggest area for potential revenue growth for lines, as well as the NEL the company. Its Singapore rail operations include: 1) its single-car (light-rail transit) LRT and DTL operations consisting of 2 lines – the Punggol LRT (16 stations over 10.3km), which opened in January 2005, and the Sengkeng LRT (15 stations over 10.7km), which opened in January 2003, as well as its MRT operations – the North-East Line (NEL) (16 stations over 20km), which opened June 2003 and the Downtown Line (DTL) (Stage 1 includes 6 stations over 4.3km), which opened in December 2013. In total, its current network has a rail length of 45.3km.
The DTL rolling stock operates on a 3-car arrangement, which is smaller compared with the backbone North-South-East-West Line (NSWEL) operated by SMRT, which operates on a 6-car arrangement. Under the New Rail Financing Framework (introduced in 2010), the government takes ownership of train assets, while the operator keeps fare revenue and bears the operating and maintenance costs – essentially an asset-light model. This has so far been applied to the DTL, but could be applied industry-wide in the future.
Singapore rail: SBST annualised daily ridership trends (m) 0.8 18% 16% 0.7 14% 0.6 12% 10% 0.5 8% 0.4 6% 4% 0.3 2% 0.2 0% 2011 2012 2013 2014 2015
Average daily ridership ADR YoY growth Source: Company
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The growth in SBST’s rail ADR has been healthy over the past several years as the addition of new lines has given commuters more access to more locations across Singapore. The average daily ridership (ADR) grew by 17.1% YoY for 2014 with the opening of DTL 1 in December 2013, while the more mature NEL has seen ADR growth of around 6% YoY since 2011.
Medium-term revenue growth from the opening of DTL Stages 2 & 3 DTL Stages 2 and 3 CDG’s rail segment is poised for further growth with the commencement of DTL Stage 2 should increase CDG’s (expected to open 27 December 2015) and Stage 3 (to open by the end of 2017). This will rail length by 83% see the addition of 37.6km of railways to the current rail network (an 83% increase overall), with a total of 28 new stations. When completed, the DTL will be instrumental in providing enhanced accessibility through the central and eastern regions of Singapore.
The DTL Stage 1 is already seeing average daily ridership levels of around 61,503 passengers/day (end-2014), a year after the commencement of operations with just 6 stations. We estimate the opening of a further 28 stations could raise ADR levels for the entire DTL network to around 350,000 by the end of 2018.
We expect margins to improve as the rail network gains traction Since its opening in December 213, start-up costs associated with operating the DTL Stage 1 saw the operating margin decline to 2.9% in 2013 (vs. 18.8% in 2011). We expect its railway operating margin to remain depressed in 2015-16, before showing signs of improvement from 2017, as start-up costs associated with the opening of DTL Stage 2 & 3 are offset by the increase in ridership as the network progressively gains traction with commuters.
CDG: Singapore rail margin 20% 18% 16% Opening of DTL Stage 1 in Dec 2013 14% 12% 10% 8% 6% 4% 2% 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Source: Company, Daiwa forecasts
Opportunities abound with government’s plans for further network expansion Government has It was announced during the recent Singapore Budget 2015 that in addition to the committed SGD26bn to SGD14bn invested in the public transport system over the past 5 years, a further SGD26bn the public transport will be committed for the next 5 years. We expect the rail network to be further expanded system to improve connectivity across Singapore, especially as vehicle population growth is capped to encourage the use of more efficient public transport.
Under the 2013 Land Transport Master Plan (LTMP), the rail network is estimated to double to 360km in 2030, from 178km currently. Two new major lines will be introduced – the Cross Island Line (50km) and the Jurong Region Line (20km). All future lines will be built under the new financing framework by the government.
In the long term, we expect the rail network to become the key mode of transport for commuters, driven by increased ‘last mile’ connectivity to homes across every area of Singapore. In turn, we expect this to reduce the reliance on feeder bus services, which currently operate as “spokes” that are connected to each transport hub.
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Further, under the GCM, operators will not have to shoulder ridership risk for its bus services. Hence, we believe this transfer of ridership from bus to rail will be positive for operators like CDG.
Singapore rail: network details Name Commencement Next extension No. of stations Rail length (km) Operator MRT North South Line 07-Nov-87 2019 26 45 SMRT Trains East West Line 12-Dec-87 2016 35 49 SMRT Trains Circle Line 28-May-09 2025 30 35.4 SMRT Trains North East Line 20-Jun-03 2030 16 20 SBS Transit Downtown Line (Stage 1) 22-Dec-13 2024 6 4.3 SBS Transit Upcoming Downtown Line (Stage 2) 1Q16 12 16.6 Downtown Line (Stage 3) 2017 16 21 Downtown Line Extension 2024 30 37.6 SBS Transit Thomson-East Coast Line (Stage 1) 2019 Thomson-East Coast Line (Stage 2) 2020 Thomson-East Coast Line (Stage 3) 2021 Thomson-East Coast Line (Stage 4) 2023 Thomson-East Coast Line (Stage 5) 2024 31 43 TBA Jurong Region Line 2025 20 TBA Cross Island Line 2030 50 TBA LRT Bukit Panjang 1999 14 7.8 SMRT Punggol 2005 16 10.3 SBS Transit Sengkang 2003 15 10.7 SBS Transit
Source: LTA
CDG looks well positioned The upcoming lines shown in the above table represent significant growth opportunities for CDG, given it currently holds around a 25% market share relative to incumbent SMRT (based on average daily ridership).
The next line to be built is the Thomson-East Coast Line (TEL) – planned to comprise 31 stations and be 43km long – and is slated to be opened in 5 stages over 2019-24, at an estimated cost of around SGD18bn. According to the LTA, when fully operational in 2024, the TEL is expected to serve about 500,000 commuters daily in the initial years, rising to 1m commuters in the longer term.
Singapore rail: Thomson-East Coast Line potential Thomson-East Coast Line No. of stations 31 Rail length 43km Rolling stock 4-car system Other features Driverless Fully underground 7 interchange stations To be opened in 5 stages from 2019-24 Potential revenue contribution ADR ('000) 500 Average ticket size per ride (SGD) 0.95 Total annual revenue (m) 174 % of 2017 rail segment revenue 61%
Source: LTA, Daiwa estimates
We estimate the TEL We estimate that the TEL could generate revenue of around SGD174m in 2024, when all could generate 31 stations are fully operational, which would represent a 61% increase in our current SGD174m in annual 2017E rail segment forecast. At the same time, CDG’s ADR market share could increase to revenue 50%, based on existing ridership levels across the entire rail network.
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As bidding has yet to be initiated and the completions of these lines are not due for several more years, the potential has yet to be priced in, in our view. We expect that bidding for these lines could commence sometime in 2017.
We believe CDG is well positioned to secure some of these contracts – this is especially so given the series of recent high-profile rail disruptions encountered by operator SMRT, including what was considered to be the worst disruption to the rail network since it first began operations in 1987. On 7 July 2015, train services on the NSEWL were suspended in both directions, lasting more than 3 hours and affecting an estimated 250,000 commuters during peak hours.
Singapore rail: network system
Source: LTA
Forecasts and assumptions We forecast revenue for CDG’s Singapore rail segment to grow at a 13.2% CAGR over the 2014-17E period, driven by the opening of DTL Stages 2 and 3 in December 2015 and end-2017 respectively. We expect an ADR CAGR of 11.4% over the same period, driven by the increased connectivity between rail lines from the opening of new stations.
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CDG: Singapore rail segment revenue forecasts (SGDm) 300 25%
20% 250
15% 200 10%
150 5%
100 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E
Singapore rail revenue (LHS) YoY growth (RHS) Source: Company, Daiwa forecasts
CDG: Singapore rail segment key assumptions 2014 2015E 2016E 2017E Singapore rail key assumptions Average daily rail ridership ('000) North-East Line 513.3 538.9 565.9 594.2 Downtown Line (Stage 1) 61.5 70.7 81.3 89.5 Downtown Line (Stage 2) - - 100.0 115.0 Downtown Line (Stage 3) - - - - LRT (Punggol/Sengkang) 86.8 95.5 105.1 115.6 Total 661.6 705.2 852.3 914.2 Average ticket size per ride (SGD) 0.81 0.83 0.84 0.86 % growth YoY 1.4% 2.0% 1.5% 1.5% Singapore rail revenue (SGDm) 196.8 214.0 262.5 285.8
Source: Company, Daiwa forecasts
UK/Ireland A mature but attractive market CDG derives around 25% (2014) of its revenue from UK/Ireland. In the UK, CDG operates a scheduled bus service (1,700 buses) on 4 service routes on the London bus network (North, West, Central and Hertfordshire), as well as a chartered coach service (39 coaches out of West London). The scheduled bus service alone accounts for around 76% of its UK/Ireland revenue, while its coach services contribute 11%, according to the company. In Scotland (Glasgow), CDG also has a partnership with Stagecoach plc (Scottish Citylink), providing coach services. In Ireland (Dublin), its fully owned subsidiary runs a network of inter-city coach service routes.
Bus: London operations to remain stable CDG is the second- In April 2013, CDG purchased the West London bus operations of FirstGroup (FGP LN, largest bus operator in GBP1.269, Not rated) through its wholly owned subsidiary Metroline Limited for London SGD111.1m, subsequently it rebranded the service as Metroline West. The latter’s fleet of 494 buses lifted CDG’s overall fleet size in London to around 1,700 buses and its market share, from 14% to about 19% currently, thus making it the second-largest bus operator (behind Go-Ahead) in London, operating in North, West, Central London and Hertfordshire, under the Metroline Limited brand.
The London bus market is almost completely run by private operators. Current regulations governing bus operations in London (overseen by the government body Transport for London [TfL]) is based on a cost-plus contract model, adjusted annually for cost inflation. Successful bidders in the tendering process are awarded contracts for 5 years typically, with a 2-year extension if performance criteria are fulfilled. However, unlike the Singapore GCM, the operators in London do not own all bus assets. In this manner, the operators do not bear ridership risks, and fares are set by the government.
The bus network in London is complex and contracts are awarded on an individual route basis (vs. a particular region in Australia or a package of routes in Singapore). With over
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700 routes, contracts are up for tender on a relatively frequent basis. According to TfL, up to 20% of the total bus service is re-tendered every year.
Given CDG’s existing market leadership in the London bus market, we do not expect growth to be driven by further acquisitions, but to occur organically, driven by revisions in route requirements (higher frequencies, servicing longer route distances, etc). In addition, management has said that it is keen to explore its options outside the London area, or beyond the bus-service segment, and believes the UK remains a favourable market for foreign private transport operators.
Forecasts and assumptions We forecast a revenue CAGR of 3.9% over 2014-17E for the UK/Ireland bus segment, as we expect organic growth of CDG’s existing operations to continue. Given its existing market leadership position in London, we would expect further growth to occur through acquisitions outside of the London area.
CDG: UK bus segment revenue forecasts (SGDm) 1,100 35% 30% 900 25%
700 20% 15% 500 10% 5% 300 0% 100 (5%) 2010 2011 2012 2013 2014 2015E 2016E 2017E
UK/Ireland bus revenue (LHS) YoY growth (RHS) Source: Company, Daiwa forecasts
Taxi: resilient customer base CDG operates its taxi services in 5 cities through its subsidiary Computer Cab (ComCab) plc – Birmingham (102 taxis), Liverpool (312 taxis), London (2,042 taxis), Aberdeen and Edinburgh (467 taxis), accounting for around 13% of the company’s UK/Ireland revenue.
UK taxi revenues earned The company’s UK taxi operations are similar to its Australia taxi business – ComCab through its despatch provides despatch services through its booking system, without owning the taxi assets and services licenses. It derives revenue through membership and booking fees from customers who book taxi services from its registered fleet using ComCab’s system.
Forecasts and assumptions We forecast UK taxi revenue to increase conservatively at a 1% CAGR over 2014-17E. We expect CDG’s UK taxi business to be more resilient relative to Australia, given the higher proportion of corporate customers in its overall customer base that utilise its despatch system in UK. As ComCab provides additional features, such as the integration of billing and information management systems to allow corporate clients to process employee claims, this makes it a more attractive system relative to the basic booking services provided by private car hire apps like Uber.
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CDG: UK taxi segment revenue forecasts (SGDm) 160 15%
150 10% 5% 140 0% 130 (5%)
120 (10%)
110 (15%) 2010 2011 2012 2013 2014 2015E 2016E 2017E UK/Ireland taxi revenue (LHS) YoY growth (RHS)
Source: Company, Daiwa forecasts
Australia Establishing its presence in a market that is opening up Australia accounts for 10.2% (2014) of CDG’s overall revenue, operating in the country mainly through its bus segment (94% of Australia revenue [2014]), as well as its taxi segment (5% of Australia revenue [2014] is derived in Perth).
Public transport services While private vehicle ownership is heavily relied on due to the low population density increasingly used in across many parts of the country, public transportation networks have become increasingly urban areas relevant, especially in the more densely populated and urbanised states such as Victoria and New South Wales (NSW).
According to the Australian Bureau of Statistics, in 2012 around 78% of the population aged 18 years and above travelled in a private motor vehicle, while 16% used public transport. NSW and Victoria were the two states with the highest public transport use (21% and 17%, respectively).
The regulatory environment for Australia’s public transport sector is complex, and varies according to state and territory, with oversight provided by the National Transport Commission. For example, in NSW, the regulator Transport for New South Wales (TfNSW), implements a competitive tendering process for bus operators according to metropolitan, outer metropolitan, rural and regional services, which are further divided by contract regions (eg, 15 contract regions encompass the greater Sydney metropolitan area).
Bus: opening up to private operators CDG’s Australia bus segment operates through its 51% stake in ComfortDelGro Cabcharge (remaining 49% owned by Cabcharge Australia [CAB AU, AUD2.95, not rated), formed in 2005. The company has a presence in the most populous state (around 7.5m) of New South Wales (in the cities of Sydney, Blue Mountains and Hunter Valley, and Queanbeyan), as well as the state of Victoria (Melbourne). As at the end of 2014, CDG was operating a total fleet of 1,697 buses in Australia.
Bus contracts are typically awarded for 7 years (with an option to extend for a further 3 years), and are based on predetermined requirements (bus routes, frequency, service standards, etc) on a cost-plus basis, similar to the proposed GCM in Singapore. However, unlike the GCM, operators own the bus depots, while buses are owned by the government.
In August 2014, CDG Cabcharge acquired the Blue Mountains Bus Company (BMB) for SGD27.8m, which owned a fleet of 101 buses and 3 depots, expanding its presence in NSW. At the same time, CDG Cabcharge successfully renegotiated regional contracts for Outer Metropolitan Regions 2 and 4, while adding 12 buses to the fleet.
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As a result, CDG Cabcharge is currently the largest private bus operator in New South Wales. The company retained its Sydney Metropolitan Bus service contract in Region 4, where it is now the sole operator with 500 buses.
In Victoria (Melbourne), CDG acquired 5 bus routes and 42 buses for AUD22m from Driver Group Pte Ltd in May 2013.
Around 75-80% of bus Looking ahead, the Australia public bus market offers opportunities for further growth, in services still state- our view. According to management, around 75-80% of the Australia bus market continues operated to be operated by the state, which had acquired inefficient family-owned private bus companies over the years. In NSW, for example, the majority of bus services is still provided by the State Transit Authority (STA), which has a fleet of over 2,151 (as at the end of March 2015) operating over 300 routes in Sydney. We believe the market could continue to open up to private operators such as CDG, which has established itself as a reliable operator.
Forecasts and assumptions According to a 2012 demand forecast report on metropolitan public transport issued by Public Transport Victoria (PTV), bus patronage is forecast to grow on weekdays at a 6.3% CAGR over the 2011-21 period, and at a 3.2% CAGR over 2021-31. Similarly, the NSW government estimates that the demand for bus services across metropolitan Sydney could grow by 30% over 2013-31, concurrent with an anticipated 1.6m increase in the population.
Overall, we forecast Australia bus revenue to see a 2.2% CAGR over the 2014-17E period.
CDG: Australia bus segment revenue forecasts (SGDm) 500 25% 20% 450 15% 10% 5% 400 0% (5%) 350 (10%) (15%) 300 (20%) 2010 2011 2012 2013 2014 2015E 2016E 2017E
Australia bus revenue (LHS) YoY growth (RHS) Source: Company, Daiwa forecasts
Taxi: under pressure Acquired in July 2010, CDG’s taxi business in Western Australia, Perth, is operated via its 100% owned subsidiary Swans Taxis. Swan is the largest provider of taxi despatch services in Perth, with a market share of 93% and a total of 2,025 taxis (2014) in its network. Its revenue contribution remains relatively small, at only around 5% of Australia revenue (2014).
Unlike its Singapore and China operations, Swan does not own its taxi fleet; rather, drivers own the licences and vehicles, and subscribe to the booking system and despatch network provided by Swan by paying membership fees. Customers who book taxis through Swan’s system also pay booking fees.
Due to the low population density of Perth, the majority of taxi services are rendered through despatch bookings. As a result, the attractiveness of Swan’s services rests on its ability to maintain a reliable booking system for commuters and a steady stream of customer bookings for drivers.
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Under the most threat Notably, new competitors, including the likes of Uber, Ingogo and WA Cabs, have entered from private car hire the taxi industry in Perth over the past year or so. We expect increased competition to put services pressure on Swan’s pricing over our forecast horizon. Overall, we forecast CDG’s Australia taxi segment to continue to see revenue decline at a CAGR of 6.8% over the 2014-17E period.
CDG: Australia taxi segment revenue forecasts (SGDm) 26 20%
24 15% 22 10% 20 5% 18 0% 16 (5%) 14 12 (10%) 10 (15%) 2011 2012 2013 2014 2015E 2016E 2017E Australia taxi revenue (LHS) YoY growth (RHS)
Source: Company, Daiwa forecasts
China Room for consolidation China accounts for around 5.3% (2014) of CDG’s overall revenue. CDG’s operations in China are primarily focused on its taxi services across 10 cities (which account for around 80% of its China revenue) including: Beijing, Chengdu, Chongqing, Jilin City, Nanjing, Nanning, Shanghai, Shenyang, Suzhou and Tianjin. It also operates a bus station in Guangzhou, which accounts for around 14% of China revenue. The remainder of its business in the country includes vehicle testing and car rental services, as well as a driving centre in Chengdu.
Similar revenue model to CDG’s revenue model in China is similar to that in Singapore – the company owns the taxi Singapore licences and fleet of vehicles, and derives its revenue from rental income to qualified drivers.
Taxi: online taxi apps gaining traction CDG has a fleet size of around 10,878 taxis (as at the end of 2014) across the 10 cities in China, with Beijing (5,501 taxis), Shenyang (1,335) and Chengdu (1,070) accounting for the 3 largest fleets.
CDG: China taxi fleet breakdown (2014) Region Fleet size Market share Nanjing 679 6% Nanning 854 17% Jilin 729 14% Beijing 5,501 8% Chengdu 1,070 7% Shenyang 1,335 6% Suzhou 165 4% Yantai, Shandong 20 Chongqing 34 Shanghai 491 Total fleet size 10,878
Source: Company
Despite being the third-largest taxi operator in Beijing, CDG only holds around an 8% market share in the city, highlighting the fragmented nature of the industry.
The issuance of new taxi licences by the government has lagged the surge in demand for taxi services over the years, allowing services by the private car hire market, enabled by online taxi apps such as Didi Dache (which merged with close rival Kuaidi Dache in
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February 2015) and Uber (including People’s Uber), to very quickly gain traction with commuters.
Since a nationwide ban loosely implemented by the government in January 2015, the provision of such services remains unlicensed and hence illegal. However, regulators appear to remain keen on balancing public demand for taxi services and encouraging the innovation of Internet companies at one end (Baidu, Alibaba and Tencent have all taken stakes in these app companies) with the interests of the licensed taxi operators on the other. At present, it remains unclear to us how policies could evolve to deal with the taxi app ecosystem itself, especially when such services continue to plug the gap in demand for taxi services.
China taxi fleet still close Based on our discussions with CDG, close to 100% of its China fleet is hired out as there to 100% hired out remains a shortage of taxis generally across the cities where CDG operates, especially in Beijing, where hailing a taxi can prove to be an arduous affair. Looking ahead, management believes that opportunities exist to consolidate its position in the market – notably, CDG’s combined fleet size in China is still equivalent to only 65% of its Singapore fleet.
Forecasts and assumptions Overall, we forecast a China taxi revenue CAGR of 4.0% over 2014-17E, driven by progressive fleet growth. We do not expect the impact of private car hire apps to negatively impact revenue, as we believe overall demand for taxi services should remain strong.
CDG: China taxi segment revenue forecasts (SGDm) 200 14% 12% 180 10% 160 8%
140 6% 4% 120 2% 100 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E
China taxi revenue (LHS) YoY growth (RHS) Source: Company, Daiwa forecasts
Other issues The threat of private car-hire apps Amongst the markets in which CDG operates taxi services, we conclude that the threat posed by private car-hire apps such as Uber is strongest in Australia and the UK, and we do not expect a material impact on its operations in Singapore and China.
Clearly, regulatory bodies across the world continue to grapple with the so far unregulated services provided by such car-hire apps. The legality of such services is still under dispute, primarily on the basis that private vehicles cannot be used for commercial purposes. Furthermore, in countries such as Singapore, drivers for private car-hire apps do not need to be Singapore citizens, and no vocational licence is required. In contrast, licensed taxi drivers must be Singapore citizens, at least 30 years of age, and have to pass a course in order to obtain a vocational licence.
Still an undersupply In the context of Singapore, we believe private car-hire companies such as Uber mainly fill issue in Singapore and a shortfall caused by undersupply. Given that there are only around 28,000 licensed taxis China in Singapore (relative to the 5.6m population of the city state), demand during peak hours clearly cannot be met. During off-peak periods, wherein demand is moderated, licensed
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taxis have a clear advantage over private car-hire services as commuters are able to hail such taxis immediately on the streets without having to wait for a booking.
The Singapore government is likely to continue to control the supply of taxi licences to ensure private vehicle growth is kept in check and traffic congestion is avoided, as it continues to build out rail infrastructure and enhance the bus model to reduce reliance on private transport.
We believe the situation is similar in China, where the market for chauffeured car services has risen rapidly with the rise of apps like Didi Dache, Kuaidi Dache and Uber (which was a late entrant into the market). However, unlike Singapore, the China taxi market is further complicated by inefficient taxi companies, and complaints by drivers that rental and repair fees are excessively high. Given the fragmented nature of the industry in China, we believe players such as CDG could stand to benefit from potential industry consolidation, given their experience in various global markets.
In Australia and the UK, where CDG derives taxi revenue from its despatch system, the ascendancy of private car-hire apps has undoubtedly increased the level of competition, given that they offer similar services to CDG. As such, we estimate that CDG’s revenue in this market could continue to remain under pressure, especially in Australia, where a greater proportion of its customer base comprises retail customers, compared with the UK, which sees a higher number of corporate clients.
Fuel prices According to the company, it has already hedged around 65% of its fuel requirements for 2015 (at a higher oil price), and around 26% for 2016. Notably, as around 60% of its diesel sales to taxi hirers are also hedged, paper losses from such diesel sales have already offset fuel cost savings.
However, should the weak oil-price climate persist, and if CDG hedges its fuel commitments from 2017, its margins could see more significant improvement from fuel cost savings, in our view.
Financial analysis Free cash flow generation likely to improve significantly Potential SGD180m We believe CDG’s free cash flow generation is likely to improve significantly following the reduction in capex transition to a GCM for its Singapore bus segment. With the Singapore government taking spend annually ownership of all bus assets, we expect CDG’s future capex commitment to purchase bus assets to be correspondingly alleviated. Cash capex on bus assets typically accounts for around 55% of CDG’s overall capex spend, which amounted to SGD517m in 2014. According to management, it expects capex levels to decline by around SGD180m annually through capex avoidance of bus fleet renewal in Singapore.
As a result, we forecast CDG’s FCF to increase strongly at a CAGR of 31.8% over 2014- 17E in the absence of any significant M&A activities, as we expect the company’s capex as a percentage of revenue to decline from 12.6% in 2014 to 8% in 2017E.
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ComfortDelGro Corp (CD SP): 22 September 2015
CDG: capex forecasts (SGDm) (% ) 650 20
600 15 550
500 10 450
400 5 350
300 0 2010 2011 2012 2013 2014 2015E 2016E 2017E Capex Capex as a % of revenue (RHS)
Source: Company, Daiwa forecasts
CDG: free cash flow forecasts (SGDm) 600
500
400
300
200
100
0 2010 2011 2012 2013 2014 2015E 2016E 2017E Source: Company, Daiwa forecasts
CDG: dividend vs. FCFE yield 9% 8% GCM 7% implementation 6% Aug 2016 5% 4% 3% 2% 1% 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E
Dividend yield FCFE yield Source: Company, Daiwa forecasts
Additionally, our FCF forecasts do not incorporate the potential for: 1) a return of capital from subsidiary SBST following the potential sale of its bus assets to the government as part of the proposed GCM. We estimate that this could result in a further SGD253m in capital (equating to around SGD0.12/share). We await further clarity on the exact timeline and purchase mechanism before incorporating the potential. 2) increased contribution to operating profit following an expected improvement in the Singapore bus segment’s operating margin. While we have factored the potential into our valuation, we continue to model this separately in the absence of greater clarity on how the bus segment’s operating landscape could evolve. We estimate improved margins could increase 2016-17E free cash flow by 5-8%, following the expected implementation of the GCM in August 2016.
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ComfortDelGro Corp (CD SP): 22 September 2015
Solid balance sheet even with asset sale proceeds On the back of strong operating cash flow generation and a slowdown in significant acquisitions, CDG ended 2014 in a net cash position of SGD88.7m. We expect the company’s net debt/EBITDA to remain in the -0.1x to -0.3x range over 2014-17E, as the company benefits from capex avoidance in its Singapore bus segment, as well as growth in its rail operations with the opening of DTL Stages 2 and 3 in December 2015 and end- 2017, respectively.
CDG: net debt/(cash) trend 300 250 200 150 100 50 0 (50) (100) (150) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Company
CDG: net debt/EBITDA ratio forecasts (x ) 0.3
0.2
0.1
0.0
(0.1)
(0.2)
(0.3) 2010 2011 2012 2013 2014 2015E 2016E 2017E Source: Company, Daiwa forecasts
Strong potential for higher dividend payout We have not factored the While the company’s official policy is to pay at least 50% of its net profit in dividends, it has potential proceeds from steadily raised its absolute dividend payout as well as the payout ratio, from 50.2% in 2010 the bus asset sale into to 62.1% in 2014. We assume CDG to maintain its payout ratio at the 65% level, although our forecasts in the absence of major acquisitions we believe there is a strong potential for the payout ratio to be higher, especially given management’s record of rewarding shareholders (eg, during 2004-07, the average payout ratio was 97%). Our 2015 forecast implies a 2015E dividend yield of 3.1%.
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ComfortDelGro Corp (CD SP): 22 September 2015
CDG: dividend and payout ratio forecasts (SGD¢) 10 70%
9 65%
8 60%
7 55%
6 50%
5 45%
4 40% 2010 2011 2012 2013 2014 2015E 2016E 2017E
DPS (LHS) Payout ratio (RHS)
Source: Company, Daiwa forecasts
Given our expectation for a build-up of cash on CDG’s balance sheet over the next few years, there is good potential for a higher dividend payout in the form of a special dividend as well, in our view. This is especially the case as the company could see a windfall from the sale of bus assets to the government in Singapore. We have not factored this potential into our DPS forecasts, given a lack of clarity as to how and when this might take place.
Key forecasts We forecast CDG’s revenue to record a 2.2% CAGR over 2014-17E, driven mainly by the 13.2% revenue CAGR that we forecast for its rail segment, in which we expect to see revenue contributions from the opening of its DTL Stages 2 and 3. This is offset by an expected decline in its Singapore bus revenues, as we anticipate that the first 3 GCM bus packages will be awarded to new entrants such as Tower Transit.
CDG: key forecasts 2014 2015E 2016E 2017E 2014-17E CAGR (%) P&L (SGD m) Revenue 4,051.3 4,125.0 4,229.1 4,329.3 2.2 % growth YoY 1.8% 2.5% 2.4% Operating profit 442.1 446.0 513.3 582.7 9.6 Operating profit margin (%) 10.9 10.8 12.1 13.5 Net profit (PATMI) 283.5 291.7 335.4 382.0 10.5 % growth YoY 2.9% 15.0% 13.9% Segmental revenue Bus 2,054.7 2,099.1 2,114.4 2,148.5 1.5 Bus station 29.1 29.4 29.7 30.0 1.0 Rail 196.8 214.0 262.5 285.8 13.2 Taxi 1,283.7 1,321.5 1,365.0 1,410.8 3.2 Automotive engineering services 302.7 272.4 264.3 256.3 (5.4) Inspection and testing services 109.1 112.4 115.7 119.2 3.0 Car rental and leasing 35.9 36.3 36.6 37.0 1.0 Driving centre 39.3 40.1 40.9 41.7 2.0 Segmental operating profit Bus 164.6 157.4 211.7 262.9 16.9 Bus station 12.5 12.6 12.8 12.9 1.0 Rail 7.6 15.0 13.1 22.9 44.4 Taxi 150.9 158.6 170.6 176.4 5.3 Automotive engineering services 51.4 46.3 47.6 48.7 (1.8) Inspection and testing services 36.8 37.6 38.8 39.9 2.8 Car rental and leasing 9.1 9.2 9.3 9.4 1.2 Driving centre 9.2 9.2 9.4 9.6 1.4
Source: Company, Daiwa forecasts
We forecast the company’s operating margin to improve by 2.5pp over 2014-17, and its net profit to see a 10.5% CAGR over the same period. We expect the improvement in operating margin to be driven by the Singapore bus segment, which should benefit from the implementation of the GCM, as ridership and revenue risk is transferred to the government.
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ComfortDelGro Corp (CD SP): 22 September 2015
Consensus revision trend The Bloomberg consensus 2015-16 EPS forecasts has seen upward revisions of 1-7% over the past 12 months, possibly due to expectations of fuel and utilities-related cost savings from the low oil price environment, offset by forex concerns negatively impacting translated earnings from its overseas operations in the UK and Australia.
CDG: Bloomberg consensus EPS revisions CDG: Bloomberg consensus EBITDA revisions (SGD) (SGD) (SGDm) (SGD) 0.170 3.3 920 3.3 0.165 3.1 900 3.1 0.160 0.155 2.9 880 2.9 0.150 0.145 2.7 860 2.7 0.140 2.5 840 2.5 0.135
0.130 2.3 820 2.3
Jul-15
Jul-15
Oct-14 Apr-15 Apr-15
Jan-15 Jan-15 Jun-15 Jun-15
Mar-15
Feb-15
Nov-14 Nov-14 Dec-14
Aug-15 Aug-15 Sep-14 Sep-14
Oct-14 Apr-15
Jan-15 Jun-15
May-15
Mar-15
Feb-15
Nov-14 Dec-14
Sep-14 Aug-15 Sep-15 May-15 FY15 EPS FY16 EPS Price FY15 EBITDA FY16 EBITDA Price
Source: Bloomberg Source: Bloomberg
Daiwa forecasts versus consensus Although our 2016-17 EPS forecasts are marginally below those of the Bloomberg consensus (by 1-3%), we attribute this largely to the variation in views on the timing and magnitude of earnings impact arising from: 1) the proposed GCM in its Singapore bus segment, and 2) the opening of DTL Stages 2 and 3 in its rail segment.
Focus on CDG’s free As such, we believe investors should instead focus on the potential for CDG’s free cash cash flow profile flow profile to improve significantly following the implementation of the GCM, as we expect the government to shoulder the purchase of bus assets post-GCM. We are forecasting a 31.8% CAGR for CDG’s FCF over 2014-17.
Valuation Methodology We initiate coverage of CDG with a Buy (1) rating and a DCF-based 12-month target price of SGD3.46. We use a DCF approach to value shares of CDG, due to the strong cash flow generative nature of the business, as well as its stable and predictable earnings growth.
We value CDG using a 10-year DCF model with the following inputs: a weighted average cost of capital (WACC) of 7.2%, comprising a 6% equity-risk premium, risk-free rate of 2.6%, a 20% long-term debt-to-capital ratio, and a terminal FCF growth rate of 1.0%.
CDG: DCF valuation inputs Long-term FCF growth 1.0% WACC 7.2% NPV - FCFF 2015-24 3,344.2 NPV Terminal FCFF 4,590.8 Total Enterprise Value 7,934.9 Less: Net debt (end-2014) (88.7) Less: Minority interest (end-2014) 648.9 Value of equity 7,374.7 No. of shares (2014 m) 2,133.1 DCF per share value (SGD) 3.46 Net debt/(cash) per share (SGD) (0.04)
Source: Daiwa forecasts
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ComfortDelGro Corp (CD SP): 22 September 2015
CDG: sensitivity of DCF analysis (2015-25E) WACC Base Terminal FCF rate 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 0.0% 4.52 4.08 3.72 3.41 3.14 2.91 2.71 2.53 2.37 0.5% 4.86 4.35 3.93 3.58 3.29 3.03 2.81 2.62 2.45 Base 1.0% 5.28 4.68 4.19 3.79 3.46 3.17 2.93 2.72 2.53 1.5% 5.82 5.09 4.51 4.04 3.66 3.34 3.06 2.83 2.63 2.0% 6.53 5.60 4.90 4.34 3.90 3.53 3.22 2.96 2.73 Source: Daiwa estimates
CDG: sensitivity of DCF analysis (2015-25E) Discount rate NPV of FCF Enterprise Value Equity Value Equity Value Per Share (SGD) 4.7% 3,736.6 13,469.6 12,909.4 6.05 5.2% 3,652.5 11,829.6 11,269.4 5.28 5.7% 3,571.2 10,541.1 9,980.9 4.68 6.2% 3,492.6 9,502.8 8,942.6 4.19 6.7% 3,416.6 8,648.6 8,088.4 3.79 7.2% 3,343.2 7,933.9 7,373.7 3.46 7.7% 3,272.1 7,327.4 6,767.2 3.17 8.2% 3,203.3 6,806.5 6,246.3 2.93 8.7% 3,136.8 6,354.3 5,794.1 2.72 9.2% 3,072.4 5,958.4 5,398.2 2.53 9.7% 3,010.0 5,608.8 5,048.6 2.37 Source: Daiwa estimates
Share price performance CDG’s shares have outperformed the benchmark FSSTI since January 2013, increasing by 62% vs. a 27% decline in the FSSTI. We believe this outperformance has been driven in part by the positive shift in the market’s outlook towards the domestic public transport industry, following several announcements by the regulator including: 1) the announcement of public fare-price increases in April 2014, 2) the proposed implementation of the GCM in May 2014 in Singapore, as well as 3) the 2013 Land Transport Master Plan, which outlined plans for an expanded rail network by 2030.
CDG: share price performance vs. FSSTI (% ) 90
70 Announcement of proposed new bus contracting model in 50 May 2014
30
10
(10) Jul-13 Jul-14 Jul-15 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Jan-13 Jun-13 Jan-14 Jun-14 Jan-15 Jun-15 Feb-13 Mar-13 Feb-14 Mar-14 Feb-15 Mar-15 Aug-13 Sep-13 Nov-13 Dec-13 Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 May-13 May-14 May-15 CDG FSSTI
Source: Bloomberg
Near-term share price Looking ahead over Daiwa’s 12-month investment horizon, we expect this outperformance catalysts to continue, as we see several potential share-price catalysts in the near-term, including: 1) greater clarity over the GCM, including details on the purchasing mechanism for the bus assets of operators, which we expect to come before August 2016, and 2) the announcement of a value-accretive acquisition or a new contract win in its overseas businesses.
With the recent 11% pullback in CDG’s share price, we believe this is a good opportunity for investors to accumulate a position in the shares, which provide exposure to the company’s defensive business across diversified business segments and markets.
CDG is currently trading at a 2015E EV/EBITDA of 8.4x, which is more than 1SD above its past-10-year historical mean of 6.2x. On a PER basis, the stock is trading at 21.1x, more than 2SD above its past-10-year historical mean of 14.6x. The last time CDG traded at such valuation levels was in 2007. In our view, CDG’s valuations appear reasonable, as we
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ComfortDelGro Corp (CD SP): 22 September 2015
believe its business is shifting gears. Strong potential revenue growth in its rail businesses, a shift toward an asset-light bus contracting model in Singapore, and an enhanced balance sheet enabling potential value-accretive acquisitions overseas all point towards longer- term earnings growth for the company and a significant improvement in its cash flow, in our opinion.
Meanwhile, its balance sheet is supported by a burgeoning cash balance (net cash of SGD88.7m as at 2014, not including the potential asset sale of its buses to the government) from strong FCF generation, while its dividend yield remains sustainable, in our view. In the absence of value-accretive acquisitions, we believe the potential for a higher dividend payout is high.
CDG: 12-month-forward EVEBITDA ratio (x) CDG: 12-month-forward PER (x) 12M forward EV/EBITDA (x ) 12M forward PER (x ) 9 24
8 +2 stdev 22 20 +2 stdev 7 +1 stdev 18 +1 stdev 6 Mean 16 Mean 5 -1 stdev 14 -1 stdev 4 -2 stdev 12 -2 stdev
3 10
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-12 Jul-14 Jul-15 Jul-10 Jul-11 Jul-13
Jul-06 Jul-09 Jul-11 Jul-12 Jul-14 Jul-05 Jul-07 Jul-08 Jul-10 Jul-13 Jul-15
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-05
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-05 Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
Land transport service providers: peer comparison Bloomberg Share price Market cap PER (x) EV/EBITDA (x) ROE (%) Dividend yield (%) Company name code (local curr.) (USD m) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Regional peers 21-Sep-15 ComfortDelGro* CD SP 2.87 4,365 21.1 18.3 16.1 8. 4 7.6 6.8 13 % 14 % 15 % 3.1% 3.6 % 4.0 % SMRT MRT SP 1.31 1,407 21.8 19.8 15.7 8.1 7.7 7.3 10% 11% 13% 2.5% 2.8% 3.6% MTR Corp 66 HK 35.15 26,528 18.9 22.0 18.9 13.4 13.4 12.1 7% 6% 6% 3.2% 3.3% 3.5% Blue Bird BIRD IJ 6,800.00 1,173 17.3 13.4 11.2 8.6 7.0 5.9 25% 26% 26% 2.1% 2.6% 3.1% Ekspress Transindo Utama TAXI IJ 550.00 81 13.3 8.1 8.4 5.5 4.8 4.2 10% 12% 12% 1.9% 1.5% 2.1% BTS Group BTS TB 9.80 3,251 44.7 43.9 42.6 37.1 33.4 31.8 6% 6% 6% 6.9% 2.6% 2.0% Average 22.7 20.8 18.8 13.4 12.3 11.5 12% 13% 13% 3.3% 2.9% 3.3% Global peers FirstGroup FGP LN 105.60 1,945 11.0 8.8 7.5 4.6 4.4 4.1 7% 9% 10% 1.3% 2.6% 3.2% Go-Ahead Group GOG LN 2,382.00 1,566 12.6 11.1 10.4 3.7 3.4 3.2 79% 64% 50% 4.3% 4.5% 4.9%
Source: Bloomberg, *Daiwa forecasts
Investment risks
Regulatory risks The public transportation sector is closely regulated by the governments in the respective markets in which CDG operates. Unfavourable shifts in the regulatory landscape could result in policies which could have an adverse impact on CDG’s business and pose downside risks to our earnings forecasts. This is the primary risk to our call.
Manpower risks Staff costs account for around 38% of CDG’s operating expenses in 2014, representing the biggest cost to its operations. The potential tightening of government restrictions on foreign labour in Singapore, or an inability to retain trained and experienced drivers, could mean that CDG has to raise wages in order to train or retain adequately skilled staff for its operations, posing downside risks to our earnings forecasts.
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ComfortDelGro Corp (CD SP): 22 September 2015
Fuel costs Fuel costs (including utilities expenses) represent around 16% of CDG’s operating expenses (2014). Although the company hedges around 20% of its expected fuel costs, a significant rise in fuel prices could have a negative impact on our earnings forecasts.
Foreign exchange risks Given that CDG has operations across several countries, it derives around 41% of its revenue from its overseas operations (2014). Despite this, the company’s overseas businesses are naturally hedged as expenses are also are incurred in domestic currencies. Hence, fluctuations in forex rates impact CDG’s net profit mainly on a translation level, and are captured in a reserve account on its balance sheet. Net translation risks are regularly monitored and the company currently does not seek to hedge this exposure as it does not impact its cash flows. We estimate that a 1% depreciation in the GBP, AUD and CNY would decrease our revenue forecasts by around 0.25%, 0.10% and 0.05%, respectively.
Shareholding structure and key management BlackRock is the largest shareholder of CDG, with a 7.0% stake.
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ComfortDelGro Corp (CD SP): 22 September 2015
CDG: selected profiles of key management Name Designation Qualifications Experience Lim Jit Poh Chairman Bachelor of Science (Hons) in Physics from the University of Singapore - Appointed non-executive Chairman and Director of ComfortDelGro Corporation and a Master of Education from the University of Oregon, USA. Limited on 1 January 2003. - Independent Director of the Company; Chairman of both the Nominating Committee and Investment Committee, and a member of the Remuneration Committee. - Chairman of SBS Transit Ltd, VICOM Ltd and Ascott Residence Trust Management Limited. These are listed companies with business interest in land transport, inspection and testing services and hospitality trust. - Chairman of several non-listed companies owned by the Singapore Labour Foundation and the National Trades Union Congress (NTUC) - Former top civil servant and a Fulbright Scholar. Awarded the Public Administration Medal by the Government of Singapore in 1972 Kua Hong Pak Group CEO Bachelor of Accountancy from the University of - Appointed Managing Director/Group CEO of ComfortDelGro Corporation Limited Singapore and is a Fellow of the United Nations Asian Institute. Attended on 1 January 2003. the Advanced Management Programme at the Harvard Business School. - Non-independent Director of the Company; Member of the Investment Committee. - Deputy Chairman of SBS Transit Ltd and VICOM Ltd. Mr Kua was appointed the Executive Director of SBS Transit Ltd in 2002 and then went on to assume the position of Managing Director/Chief Executive Officer of DelGro Corporation Limited in 2003. - Prior to this, he was the President/Chief Executive Officer of Times Publishing Limited, where he managed its Singapore and overseas operations in the US, UK, China, Japan, Hong Kong and Australia. Choo Chek Group Financial Bachelor of Economics (Hons) from the Australia National University and - Joined the Group in July 2003. Siew Officer is an Australian Chartered Accountant. - Started his career with PricewaterhouseCoopers and moved on to become Group Internal Audit Manager of United Engineers Ltd. - Regional Financial Controller at Citibank N.A and Chief of Staff at Union Bank of Switzerland before joining the Development Bank of Singapore Ltd as Head of Integration. - Prior to joining the Group, he was with Oversea-Chinese Banking Corporation Ltd as Group Head of Finance. Gan Juay Kiat CEO, SBS Transit President’s Scholar and an SAF (UK) Scholar, holds a Bachelor of Arts - Appointed Chief Executive Officer of SBS Transit Ltd on 1 March 2010. He (Engineering Tripos) from the University of Cambridge, United Kingdom. joined the Group in February 2006 as Group Corporate Planning Officer. - Prior to this, he was the Chief Executive Officer and Director of ComfortDelGro Bus Pte Ltd before assuming the role of Chief Operating Officer of SBS Transit in April 2007. He was appointed Executive Director on 1 March 2009. - Prior to joining the Group, Mr Gan was Chief Corporate Officer at the Ascott Group, Senior Vice President (Corporate Planning) at CapitaLand Limited, Senior Vice President (Retail & Distribution) at Times Publishing Limited and Divisional Director at General Electric. - Started his career in the Singapore Armed Forces (SAF) where he held several senior command and staff appointments. Sim Wing Yew CEO, VICOM Bachelor of Engineering (Hons) in Mechanical and Production - Appointed Chief Executive Officer of VICOM Ltd on 1 May 2012. Engineering from Nanyang Technological University and a Master of - Prior to this appointment, he was Chief Operating Officer of ComfortDelGro Business Administration from the University of Hull, United Kingdom. Engineering Pte Ltd from August 2008 before assuming the role as Chief Executive Officer on 1 March 2011. - First joined the Group in September 2002 as a General Manager in charge of two maintenance workshops in SBS Transit Ltd’s Fleet Management Department. In June 2006, he assumed responsibility as the General Manager for all five SBS Transit’s workshops. Leong Kwok CEO, North China Bachelor of Engineering from the University of Singapore. - Responsible for the supervision and development of North China businesses. Sun Business Unit - Prior to joining the Group, Mr Leong was the Senior Vice President in Times Publishing Limited. He has held senior positions in various organisations in his more than 30 years of working life with extensive experience in manufacturing industries and managed overseas operations, especially in China. - Registered professional Engineer and was trained in West Germany on Marine Engineering and Special Ship Construction. Jim Glasson CEO, Bachelor of Urban and Regional Planning (Hons) from the University of - Joined the Group in June 2009 and is the Chief Executive Officer of ComfortDelGro New England, NSW, Australia. ComfortDelGro Cabcharge Pty Ltd. Cabcharge - Prior to joining the Group, he was Director General of the Ministry of Transport (MoT) in New South Wales (NSW). - Before his appointment as Director General, Mr Glasson was MoT’s Deputy Director General and Executive Director of the Policy and Strategic Co-ordination Group where he was responsible for the leadership and direction of the Ministry’s policy functions and Ministerial support unit. - Previously Acting Chief Executive Officer of the Port Kembla Port Corporation. Jaspal Singh CEO, UK/Ireland Bachelor of Arts (Economics) and a Bachelor of Engineering (Industrial - Colombo Plan Scholar; joined the Administrative Service in 1978. Business Unit Engineering) (Hons Class One) from the University of Newcastle, - Held many senior-level appointments over the years, including Deputy Australia, and a Master of Public Administration from the Kennedy Secretary in the Ministries of Finance and Transport. Mr Singh also held various School, Harvard University, USA. He has also completed the Advanced directorships on the boards of Government-linked companies. Management Programme at the Harvard Business School.
Source: Company
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ComfortDelGro Corp (CD SP): 22 September 2015
Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan) TAIWAN Junjie TANG (852) 2773 8736 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Macro Economics (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Jonas KAN (852) 2848 4439 [email protected] (Regional) Head of Hong Kong and China Property Steven TSENG (886) 2 8758 6252 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] IT/Technology Hardware (PC Hardware) Property (China) Christine WANG (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Banking (Hong Kong/China); Broker (China); Insurance (China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Jamie SOO (852) 2773 8529 [email protected] Small/Mid Cap Gaming and Leisure (Hong Kong/China) Dennis IP (852) 2848 4068 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Kelvin LAU (852) 2848 4467 [email protected] Capital Goods; Utilities
Head of Automobiles; Transportation and Industrial (Hong Kong/China) SINGAPORE Brian LAM (852) 2532 4341 [email protected] Ramakrishna MARUVADA (65) 6499 6543 [email protected] Transportation – Railway; Construction and Engineering (China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Jibo MA (852) 2848 4489 [email protected] Royston TAN (65) 6321 3086 [email protected] Head of Custom Products Group Oil and Gas; Capital Goods Thomas HO (852) 2773 8716 [email protected] David LUM (65) 6329 2102 [email protected] Custom Products Group Property and REITs
Shane GOH (65) 64996546 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Utilities and Energy Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)
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ComfortDelGro Corp (CD SP): 22 September 2015
Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469
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ComfortDelGro Corp (CD SP): 22 September 2015
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This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
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Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the
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ComfortDelGro Corp (CD SP): 22 September 2015
protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
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United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).
Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings Rating Percentage of total Buy* 60.4% Hold** 26.0% Sell*** 13.6% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
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