Compiled by Kenneth Lim, The Business Times
COMFORTDELGRO CORP | BUY
TARGET PRICE: S$3.24
DEC 22 CLOSE: S$2.51
RHB Research, Dec 22
Finally, the cash kept for acquisition has been put to use.
Management stated that cash consideration of A$186 million (S$194 million) would be funded through a combination of internal funds and bank borrowings.
However, we believe there is enough funds on ComfortDelGro's balance sheet to fund the acquisition fully in cash, while maintaining an increasing dividend payout ratio. The company to be acquired - ComfortDelGro Cabcharge - operates contract scheduled bus, school bus, private contract and charter bus services in Australia with a total of 1,712 buses and staff strength of about 2,300.
We estimate the acquisition to add S$12m to S$13m to ComfortDelGro's profit in 2017-18, assuming ComfortDelGro Cabcharge's net margin remains unchanged as compared to 2016.
In 2016 (June year-end), ComfortDelGro Cabcharge saw a 4.5 per cent decline in net profit with net margin declining to 8.38 per cent from 8.96 per cent in 2015. ComfortDelGro stated that the acquisition price of A$186m is based on a valuation of 4.6 times 2015 earnings before interest, tax, depreciation and amortisation (Ebitda) for ComfortDelGro Cabcharge.
The business was carried at A$251.8m as at June 30, 2016 in Cabcharge Australia's books, which is higher than the price to be paid by ComfortDelGro.
We expect ComfortDelGro's Singapore bus business to book 7-8 per cent Ebit margins from Q4 FY16 under the government contracting model, which should support growth in 2017.
Its Singapore taxi business has seen negligible impact from rising competition presented by Uber and Grab. While we expect the growth of its fleet to decelerate, its taxi rental rates (and taxi revenues) should rise as it continues to replace older cars with newer taxis.
We view ComfortDelGro as a company that has the ability to generate strong cash flow, deliver steady profit growth, and offer gradual dividend growth.
Acquisitions, similar to the one just announced, could further grow earnings despite an uncertain economic environment. We reiterate our "buy" call with a slightly higher discounted cash flow-based target price of S$3.24 (previous S$3.19) as we raise FY17-18 profit forecast by 3.0-3.3 per cent.
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