Excerpts from analysts' report
Deutsche Bank analysts: Joe Liew, CFA & Joshua Lee, CFA
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Its strong balance sheet is backed by its net cash position coupled with a healthy FCF. The sale of bus assets could net S$900m (42cents/share) cash (we have assumed 20% discount to bus NBV in 3Q16). Higher dividend payout (currently 62%) or a special dividend could result if acquisitions do not materialize. The company offers good diversification exposure as half of its operating profit is derived from its overseas operations.
On the back of our average fare forecast increases, we have revised our core earnings growth for 2015-17 from 7%/20%/17% to 8%/27%/15% (refer to Figure 42). We increase our target price by 17% to S$3.88/share.
Earnings forecast raised
We have raised our core earnings forecast for 2016 and 2017E by 6.1% and 4.8% respectively to take into account increased average fare growth in 2016- 17E of 4% p.a. from 0% in 2016 and -1% in 2017. This more positive fare growth assumption stems from the completion of the DTL as well as more residential supply along the NEL.
In the bus business, we have assumed that CD’s market share reduces from 75% at present to 50% by 2017E (i.e. it does not win any of the initial three tender packages).
Our net profit forecasts are above consensus in 2016-2017E likely because of higher average fare growth and a more optimistic outcome on the bus reforms.
Target price increased by 17%
We value ComfortDelGro based on a DCF analysis using 7.4% cost of equity (2.9% risk free rate, beta of 1, 4.5% equity risk premium, 0% debt/equity on the back of the company's net cash position) and 1% terminal growth rate to reflect the long-term growth potential of the Singapore land transport sector. In our DCF forecasts, we have assumed an average rail fare increase of 4% in 2018E, 3% in 2019-20E, 2% in 2021-22E, 1% in 2023-24E and 0% terminally.
The percentage increase in target price is greater than the percentage increase in earnings because the fare increases we are assuming have a larger impact on future cash flows compared to nearer-term ones.
Risks
Key downside risks: FX negatively affecting revenue translations from overseas businesses; other regulatory risks affecting both the domestic and overseas operations; radical change in competitive landscape due to regulatory liberalization; and lower-than-assumed margins for the Singapore bus and rail businesses.
