Analysts at Maybank Securities, DBS Group Research and CGS International (CGSI) are positive on ComfortDelGro C52 (CDG) after the company’s Australian subsidiary ComfortDelGro Corp Australia (CDCA) won three bus franchises within the Victorian Department of Transport and Planning’s Metropolitan Zero Emission Bus (ZEB) Franchises tender process.
The three franchises are worth around A$1.6 billion ($1.4 billion) over 10 years. Under the new franchises, which comprise 250 public bus and school routes serviced by over 360 buses, buses and depots are funded as part of the contracts and will transition to full ZEB operations prior to the end of the contract term. The term will commence on July 1, 2025.
Assuming 6% ebit margin and a corporate tax rate of 30%, Maybank analyst Eric Ong estimates the incremental profit contribution at about $5.9 million per annum on a full year basis.
Maybank is keeping its FY2024 earnings per share (EPS) estimates intact. However, the analyst has raised his FY2025 and FY2026 forecasts by 1%-2% after factoring in the latest contract wins, keeping “buy” with a higher target price of $1.65 from $1.60 previously.
Despite the increased routes, CGSI analyst Ong Khang Chuen thinks that the impact on recurring EPS from this contract win will be minimal, as CDG has previously indicated that margins could be slightly compressed due to competitive pressure. The analyst is reiterating his “add” call with a target price of $1.70.
“Nevertheless, we think the sustained momentum in securing overseas contracts could bode well for CDG’s share price. In the past two years, CDG has successfully secured tenders in Australia, which include the retention and expansion of metropolitan Sydney services, the retention and expansion of Outer Metropolitan New South Wales (NSW) services, and growth in its Darwin public bus services portfolio,” he adds.
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DBS analyst Andy Sim points out that CDG will be selling its existing bus depots to the state and expects to record a one-off $14 million net profit upon contract commencement in its 3QFY2025 financials.
The proceeds from the sale of the bus depots will be deployed for further investment, capital expenditure or debt replacement within Australia. In addition, it will need to provide the initial funding to acquire an additional 86 buses and support the transition to electric buses by end of the contract term, he notes.
While DBS is uncertain on the exact changes in contract value and margin, Sim believes the company will likely see a top-line uplift on expanded operations, which may be offset by lower margin given the transition to a less risky asset light model.
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“Net-net, we believe the profit impact, excluding the one-off gain on bus depot sale, is likely immaterial. Nonetheless, we believe this remains a positive as it alleviates lingering investor concern of lower profitability of Australia business and highlights its ability to grow its international business,” he adds. DBS is maintaining its “buy” call on CDG with a target price of $1.80.
As at 10.45am, shares in CDG are trading 1 cent higher or 0.7% up at $1.44.
