• Reiterate BUY and SGD1.65 TP, 14% upside and c.5% yield. Metroline, ComfortDelGro’s UK bus subsidiary, was awarded contracts to operate four public bus franchises in Greater Manchester. The contracts, which start in Jan 2025 and are spread over a period of five years, have a total value of GBP422m. The contracts have the option to be extended for up to two years. We maintain our strong earnings growth outlook for CD in 2024 and assess that these new contracts will increase FY25 earnings by 1.8–3.6%.

• Details of the contract. Metroline, which is the fourth-largest scheduled bus operator in London and operates about 17% of the city's scheduled bus services, has collectively won four bus packages worth GBP422m (c.SGD720m). The contracts are spread over five years, with options to be extended for two, one-year terms. The contract comprises of a total of 232 different services served by 420 buses and over 1,350 employees, adding twice as many services and a 30% increase over its existing portfolio. Metroline currently has a fleet of over 1,300 buses.

• Earnings impact. Assuming the contract value is evenly spread across the five years, the annual contract value would be SGD144m. CD’s public transport business currently generates a 4% EBIT margin. Assuming a 4-8% EBIT margin and a 25% tax rate, we estimate the incremental earnings in 2025 from these contracts would be between SGD4.3m and SGD8.6m. This translates to a 1.8–3.6% upside to our existing 2025F. However, we have yet to incorporate this into our estimates.

• Near term earnings growth drivers. We expect CD’s earnings growth to be driven by higher Singapore rail revenue, continued improvement in its UK public transport revenue, strong Singapore taxi earnings amidst the increase in fares and commission rates, as well as the introduction of a new fee for bookings on the Zig platform, improvement in its China taxi business, and contributions from recently announced acquisitions.

• Potential re-rating catalysts. We had highlighted in our previous note that the first review of point-to-point (p2p) transport industry structure and the proposed regulatory policy changes are positive for taxi operators, especially for CD. We believe that the results of the final review of the p2p transport industry will continue to be positive for CD. In addition, we expect the potential integration of Gojek’s booking with the Zig platform to further drive taxi demand and CD’s winning of the Seletar bus package in Singapore as additional re-rating catalysts. Our TP includes a 6% ESG premium to its fair value of SGD1.55.

Source: RHB Research - 5 Apr 2024