ComfortDelGro Corporation - Earnings Accretive Australian Acquisition
- ComfortDelGro plans to acquire 49% stake in ComfortDelGro Cabcharge from its partner, Cabcharge Australia, for AUD186m (~SGD196m) in cash.
- Subject to approval from Australian Foreign Investment Review Board, the acquisition is expected to be completed in 1Q17.
- We reiterate BUY on ComfortDelGro as we increase FY17-18F profit by 3.0-3.3% and raise TP to SGD3.24 (previous SGD3.19, 27% upside).
- We remain positive on ComfortDelGro’s well-diversified business that offers growth avenues even in a weak economic environment.
Finally the cash kept for acquisition has been put to use.
- Management stated that cash consideration of AUD186m would be funded through 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.
Acquisition should be accretive to ComfortDelGro.
- We estimate the acquisition to add SGD12-13m 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% decline in net profit with net margin declining to 8.38% from 8.96% in 2015.
Valuations at below book value.
- ComfortDelGro stated that the acquisition price of AUD186m is based on a valuation of 4.6x 2015 EBITDA for ComfortDelGro Cabcharge. The business was carried at AUD251.8m as at 30 June 2016 in Cabcharge Australia’s books, which is higher than the price to be paid by ComfortDelGro.
Positive on Singapore bus and taxi business.
- We expect ComfortDelGro’s Singapore bus business to book 7-8% EBIT margins from 4Q16 under the government contracting model (GCM), which should support growth into 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 well-diversified company with an excellent management team 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 boost earnings growth despite an uncertain economic environment.
- We reiterate our BUY call with a slightly higher DCF-based TP of SGD3.24 (previous SGD3.19) as we raise FY17-18 profit forecast by 3.0-3.3%.