We hosted ComfortDelGro (CD)  at a non-deal roadshow (NDR) in Hong Kong  (HK),  during  which  Management  addressed  investors'  queries. The  key  takeaways  were:  i)  CD  expects  its  overseas  markets  to continue  to  grow,  ii)  a  cost-plus  model  could  boost  its  domestic  bus operation,  iii)  CD  needs  a  strong  balance  sheet  to  support  M&As,  and iv)  Singapore  Labour  Foundation  (SLF)'s  divestment  of  its  stake  is  no cause for concern. Maintain BUY, with our DCF-based TP at SGD2.25. 

- Overseas  markets  continue  to  expand.  We  think  profit  growth  will stem  from  the  UK  market,  with  the  recent  London  bus  acquisition increasing its fleet by 41% to 1,694 buses. CD also sees opportunities in Australia  as  many  bus  operators  there  are  still  state-run.  It  is  mulling expansion  to  new  markets  abroad,  depending  on  government infrastructure  and  the region's political  stability,  as  well  as  the  project's ability to meet the target mid-teen internal rate of return (IRR).

- A  cost-plus  model  could  boost  domestic  bus  operations.  We  think the group could employ a cost-plus model, in line with the Government's objective  of  balancing  public  transport  affordability  with  operators' financial sustainability. If SBS Transit bus  ops run on a cost-plus model with  7.7%  EBIT  margins  -  based  on  UK  margins  -  its  FY12  operating profit  would  have  reached  SGD46.3m  instead  of  an  operating  loss  of SGD14.7m, while its FY12 group earnings would have been 20% higher.  

- Conservative balance sheet to support acquisition growth. Investors expressed  concerns  on  CD's "overly  conservative"  balance  sheet  and requested a higher payout ratio. The company stressed that it requires a robust  balance  sheet  to  support  future  M&A  activities  but  does  not  rule out lifting its future payout ratio should its cash flow strengthen further.   No impact on fundamentals from SLF's selldown. CD maintains that there  are  no  changes  to  its  fundamentals  despite  the  selldown  by Singapore Labour Foundation (SLF) of its CD stake, as SLF had always been a passive stakeholder with one non-executive board seat. We think SLF,  which  has  a  broad  portfolio  of  investments  that  it  reviews  and rebalances  on  an  ongoing  basis,  may  have  regarded  this  period  as  an opportunistic time to exit the company. 

Source: OSK