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CIMB in its latest report reiterated its "add" call on the shares of ComfortDelGro (CDG), with a higher target price of S$3.42, up from S$3.11.
The positive outlook for CDG's earnings growth is firstly driven by the implementation of the government contracting model (GCM), said CIMB analysts Roy Chen and William Tng. Under the new GCM, the government will own all bus assets and related infrastructure, allowing CDG to unlock about 12 per cent of its equity capital from the low-return Singapore bus business.
"We expect S$1.2 billion worth of asset sales by SBS Transit (75 per cent-owned subsidiary) in 2016, to bulk CDG's net cash up to S$642 million (move adds S$236 million or 11 Singapore cents per share after retiring all related liabilities)," the analysts said in the report.
CDG could deploy the freed capital to pursue a proven, successful overseas growth strategy or reward its investors with a special dividend, they added.
Moreover, even without a contracted margin from the GCM (estimated 8-10 per cent operating profits margin effective September 2016), CDG will enjoy earnings tailwinds from lower energy prices (FY2015 net profit: +S$24 million; FY2016: +S$41 million), said Mr Chen and Mr Tng.
Post-GCM, energy costs will be a "cost pass-through", negating any concerns of an eventual bounce in oil prices. The benefits are mostly from Singapore rail and bus (55 per cent of energy consumption) as other bus operations are already energy-indexed, the report said.
Thirdly, a turnaround of losses in the Downtown Line operations - which the analysts project will happen between the commencement of stage II (Q1 2016) and stage III (2017) - will bode well for CDG's earnings growth.