Can CDG successfully navigate 2016’s rocky economic landscape?

It’s banking on M&A, Australia bus business to boost profits.

ComfortDelGro (CDG) is on the fast lane to robust 2016 profits, as management anticipates growth in the company’s local segments.

According to a report by RHB, investors appreciate CDG’s ability to deliver predictable profit growth with low risk profile despite the uncertain economic landscape. Management is confident that its domestic bus, taxi and rail segments will see growth, bolstered by mergers and acquisitions (M&A), especially in Australia.

RHB asserts that given the asset-light nature of Singapore’s Government Contracting Model (GCM), core bus operating margins should be below UK’s 10% margin. Counting advertising and rental revenue to core bus earnings, CDG’s net operating margin for its bus operations under GCM should reach around 7-8%.

Meanwhile, there remains a looming possibility of deferred payment for the sale of CDG’s bus assets. CDG management underscored that the government may not opt for a lump sum upfront payment.

Further, CDG is banking on overseas M&A and its Australia bus business to fuel long-term growth. Management believes that among all overseas markets, CDG’s Australia bus business offers long-term growth potential as private players currently run less than a quarter of bus operations. Over the long-term, CDG also aims to secure a sustained profit contribution of 60% from overseas operations.

Management was also unruffled by foreign exchange movements. The company is able to match overseas revenue with costs, which acts as a natural forex hedge as GBP depreciates against SGD. CDG does not hedge this exposure as it does not hurt cash flows, largely because CDG does not remit overseas profits to Singapore.