How will the LTA pay for ComfortDelGro's buses?

The buses are worth $800m.

ComfortDelGro might be able to wrangle a higher price than initially expected for its bus assets, according to a report by OCBC. This is because its subsidiary SBS Transit sold 50 new buses at $23 million to the Land Transport Authority over the holidays, signalling that the LTA might be willing to pay for the rest of CDG's buses at net book value (NBV).

OCBC said that there are two potential ways that CDG can transition to the asset light Government Contracting Model. The regulator can either pay a lump sum of around $800m for its bus assets, or the LTA can make the payments progressively over five years by structuring the transition as a finance lease.

“This means that LTA will make progressive instead of lump sum payment. For the second method, we believe LTA is likely to spread payments over a five-year period to match the length of GCM contract tenure. As CDG removes bus assets from its balance sheet, it will also need to record a corresponding amount in its receivables, which will decline with each LTA payment, until zero by the end of the fifth year. Both methods will eliminate the annual depreciation charge," OCBC said.

OCBC is convinced that SBS Transit’s recent asset sale will result in greater investor confidence in ComfortDelGro.

“In our view, the announcement gives a clearer signal that LTA may be willing to pay for the rest of CDG’s buses at NBV (~S$800m after stripping out buses financed by LTA), as progress is being made towards completing the shift to the new bus government contracting model (GCM) by 2H16,” OCBC said.