ComfortDelGro to benefit from LTA’s new bus contracting model

Payment for the buses will improve its free cash flow.

While the bus segment of ComfortDelGro Corporation Ltd. continues to face losses, the group could look forward into the Land Transportation Authority's new bus government contracting model (GCM) to relieve its woes.

Under the the model, LTA will buy bus assets from ComfortDelGro with payments based on depreciation of the buses over their statutory lifespan at 17 years.

According to the group, the fleet age is approximately 6 years, implying an average remaining useful life of around 11 years.

Analysts from the OCBC Investment research explained that the LTA will take owneship of these buses as it pays over time.

"While the assets remain on CDG’s books, we note that these payments are also included in the announced total contract fees of S$5,322m, which will offset the annual depreciation charge" they said in a report released on Monday.

The analysts explained The said amount is derived after subtracting ComfortDelGro's forecasted advertising and rental revenue from bus operations over the contracted tenures for their eight packages.These rental revenue earned will then be retained by the group.

This would result to a boosted free cash flow (FCF) for the group.

"In our view, the key benefit post-GCM is the improved FCF of CDG, as non-cash depreciation charge becomes a positive cash inflow as payment for the buses," the analysts said.

ComfortDelGro's net profit for 2Q16 rose 5.3% to $85.2, mainly due to its operating expenses growing slower.

For the said quarter, however, the group suffered a revenue fall of 1.4%.