Winner takes it all: ComfortDelGro is the biggest beneficiary in new bus scheme

It can get around $5.3b worth of contract fees.

Transportation company ComfortDelGro is in for brighter days ahead as the Land Transportation Authority (LTA)'s new government bus contracting model (GCM) is expected to spike up its cash inflow.

According to OCBC Investment Research, ComfortDelGro (CDG) will definitely be the main beneficiary of the new model as it has in its arsenal around 2,900 buses representing 70-75% market share of Singapore's public bus operations.

Under the new model, which will come to effect on September 1, LTA will own all operating assets including buses and lease them to operators by paying a fee equivalent to the depreciation of the buses. The group will receive $5.3 billion in estimated total contract fees.

"For CDG, while the statutory lifespan for all its bus assets is 17 years, we understand from management average fleet age is ~6 years, which implies an average remaining useful life of ~11 years. This means that more likely than not, if CDG does lose any of the package upon expiry of the contracts, LTA may have to pay lump sum for the remaining NBV of the bus assets for that package, in order to lease out to the new operator," the report stated.

More so, the non-cash depreciation charge becoming a positive cash inflow as payment for the buses would result to a boosted free cash flow for ComfortDelGro.

OCBC believes that with the transition to CGM, the transport group would be able to juice out benefits such as higher dividends and more acquisitions.

"As a result, there are two positive benefits out of this transition for CDG: 1) paying out higher dividends to shareholders, and/or 2) making acquisitions (particularly overseas) to further expand geographical footprint and diversify revenue base,” OCBC noted.