• Taxi business remains resilient
• FCF to improve under bus GCM
• Bus assets transferred to LTA progressively

Revenue impacted by weaker GBP against SGD

ComfortDelGro (CDG) 2Q16 revenue fell 1.4% YoY to S$1.02b due mainly to a negative S$18.0m foreign currency translation effect, in which the weaker GBP accounted for S$13.0m. If not for the translation effect, revenue would have grown 0.3%, driven by Rail (+24.5%), and Taxi (+2.8%) segments, but partially offset by Bus (-4.6%) segment.

2Q16 operating expenses fell 1.8% YoY to S$899.4m mainly due to a favourable S$15.9m foreign currency translation effect. If not for the translation effect, 2Q16 operating expenses would have been flat YoY. Consequently, 2Q16 PATMI grew 5.3% YoY to S$85.2m.

For 1H16, revenue grew marginally by 0.9% YoY to S$2.02b impacted by unfavourable currency effect, but operating expenses grew at a slower pace due to lower energy costs and materials and consumables costs. As a result, 1H16 PATMI rose 6.8% to S$158.6m, which formed 48.1% of our FY16 forecasts.

LTA to take ownership of buses over time

Under the new bus government contracting model (GCM), LTA will buy bus assets from CDG at NBV (net book value), with payments based on the depreciation of the buses over their statutory lifespan (17 years). However, we understand from management average fleet age is ~6 years, which implies an average remaining useful life of ~11 years.

LTA will take ownership of the bus assets as it pays over time, and while the assets remain on CDG’s books, we note that these payments are also included in the announced total contract fees of S$5,322m, which will offset the annual depreciation charge.

We also note that S$5,322m is derived after deducting CDG’s forecasted advertising and rental revenue from bus operations over the contract tenures for their eight packages. Hence, post-GCM, any advertising and rental revenue earned will be retained by CDG.

In our view, the key benefit post-GCM is the improved FCF of CDG, as non-cash depreciation charge becomes a positive cash inflow as payment for the buses.

Reiterate BUY

All said, we keep our earnings forecasts largely unchanged but adjust our cash flow assumptions for GCM, and risk-free rate downwards on lower interest rate environment. Reiterate BUY on CDG with the same FV of S$3.21.  

Source: OCBC Research - 15 Aug 2016