• Better clarity with recent signal from LTA
• Lump sum or progressive payment?
• Upgrade to BUY

LTA to buy 50 buses at NBV and take over future bus capex

While many were away on vacation, SBS Transit Ltd (SBST), which is a 75%-owned subsidiary of ComfortDelGro (CDG), announced on 29 Dec 15: 1) the sale of 50 new buses, purchased between Jun-Dec 15, to LTA at NBV (~S$23m), and 2) the novation of procurement contracts (worth ~S$164m) for purchase of new buses scheduled for delivery in FY16 and FY17 to LTA, effectively shifting future bus capex obligations to the government.

In our view, the announcement gives a clearer signal that LTA may be willing to pay for the rest of CDG’s buses at NBV (~S$800m after stripping out buses financed by LTA), as progress is being made towards completing the shift to the new bus government contracting model (GCM) by 2H16.

Two possible ways for CDG to shift to assetlight model

Based on our assumptions, we believe there are two likely ways CDG’s transition to the assetlight GCM could be structured. The first is straightforward, with LTA paying CDG a lump sum of ~S$800m in cash to buy over CDG’s remaining bus assets at NBV.

The second is to structure it as a finance lease, where CDG provides financing to LTA for the purchase of its bus assets, which will shift the S$800m worth of bus assets from CDG’s balance sheet onto LTA’s books. This means that LTA will make progressive instead of lump sum payment.

For the second method, we believe LTA is likely to spread payments over a five-year period to match the length of GCM contract tenure (FY16 to FY21). As CDG removes bus assets from its balance sheet, it will also need to record a corresponding amount in its receivables, which will decline with each LTA payment, until zero by the end of the fifth year. Both methods will eliminate the annual depreciation charges (FY14: ~S$60m).

Blended DDM-based valuation methodology

Factoring in these assumptions, our DDM-derived (terminal growth: 2.5%) FV estimate increases from S$2.99 to S$3.40, based on a blendedbasis, assuming the probability of each structure materializing being equal (i.e. 50%) at this juncture, without more details from LTA. At current price, we upgrade CDG from HOLD to BUY.

Source: OCBC Research - 5 Jan 2016