ComfortDelGro has won contracts worth £ 422 million, or $720 million, to run public buses in the UK for five years.

 

The contracts, won by its UK unit Metroline, were given by the Greater Manchester Combined Authority (GMCA).

 

The contracts come with options to be extended for two, one-year terms. 

 

Under these contracts, Metroline will operate 232 different services using 420 buses and over 1,350 employees, which adds twice as many services and a 30% increase over its London portfolio.

 

" We are honoured to be a partner in Greater Manchester&rsquo s transportation story and look forward to other new bus franchise opportunities in the Northwest and across the UK in the future," says managing director and group CEO Cheng Siak Kian.

 

" This aligns with our broader strategy to strengthen and strategically grow our core public transportation and point-to-point businesses and solidify our reputation as the multi-modal transport operator of choice," says the company' s chairman Mark Greaves.

 

ComfortDelGro' s UK unit, Metroline, is the fourth largest scheduled bus operator in London and operates about 17% of the city' s scheduled bus services. 

 

Metroline is part of ComfortDelGro C52 0.71% &rsquo s wider operations in the UK, which include Argyle Satellite, Adventure Travel, CityFleet Networks, Computer Cab, KingKabs, Scottish Citylink Coaches, Megabus and Westbus Coach Services. 

 

These companies operate in 23 different towns and cities, offering different kinds of transport services via buses, coaches, taxis, and private hire vehicles.

 

Post-pandemic, ComfortDelGro is steadily expanding its overseas presence.

 

Earlier this year, it bought UK-based CMAC Group, a leading ground transport management and accommodation network specialist.

 

It is active in Australia too, with the recent completion of A2B Australia.

 

As part of the broader push towards sustainability, ComfortDelGro C52 0.74% , which initially experimented with electric vehicles (EVs) in 2016, half of its fleet now consists of clean energy vehicles, including fully electric and hybrid models. The goal is to raise this figure to 90% by 2030 and 100% by 2040, a target ComfortDelGro group CEO Cheng Siak Kian is &ldquo quite certain&rdquo they can achieve.

 

&ldquo If you look at all the new cars given out last year, they are all either electric or minimally hybrid. The [Toyota] Prius and [Hyundai] Kona are all electric. Even the Lexus cars are all hybrid &hellip All taxis are being replaced with at least hybrid models,&rdquo he adds.

 

It is not just the traditional internal combustion engines of its taxi fleet that ComfortDelGro is seeking to electrify. This shift towards greener vehicles has expanded to hybrid and fully electric buses in its markets, including Singapore, Australia and the UK as well as in other businesses such as its driving centres.

 

ComfortDelGro is also looking to enter the EV charging business. In September 2021, the group and French utility company Engie won three of five tenders to install 479 of the 632 electric chargers introduced in 2022. In November 2022, ComfortDelGro Engie was awarded two in 10 packages by the Land Transport Authority (LTA) to install EV charging points in nearly 2,000 HDB carparks.

 

Last October, ComfortDelGro Engie signed an agreement with Malaysia&rsquo s Yinson GreenTech (YGT) to offer EV drivers on both sides of the Causeway their combined network of more than 1,000 charging points &mdash close to 400 by YGT in Malaysia now and more than 600 from ComfortDelGro Engie. This will make the combined network the largest in the two countries which see regular and heavy traffic movement. The two parties plan to hold on to this lead by expanding the combined network to 8,000 points by 2030, with 5,000 charge points in Singapore and 3,000 in Malaysia.

 

The pace of electrification is not decided by ComfortDelGro though. &ldquo Part of the challenge of electrification is also how fast the client wants us to electrify their fleet,&rdquo Cheng explains, citing his operating contracts with clients in Australia and the UK, where clients get to choose what vehicles to use. Similarly, in Singapore, the pace of electrification for its fleet of buses is determined by owner LTA.

 

Where ComfortDelGro&rsquo s taxis are concerned, about 65% of its fleet in China is already fully electrified as of last year. &ldquo That number will continue to increase because the Chinese government has been very supportive, through various incentive schemes that they have to encourage the conversions of ICE or hybrid to fully EVs,&rdquo says Cheng.

 

In Singapore, however, ComfortDelGro is still &ldquo working on it&rdquo , although it depends on how receptive the local taxi drivers are to EVs. In this case, Cheng understands that it&rsquo s a &ldquo chicken and egg&rdquo issue because it also depends on the availability of EV infrastructure.

 

&ldquo There are the usual issues that you have to work at for EVs,&rdquo says Cheng on why taxi drivers in Singapore are not as receptive. While the current generation of EVs has overcome the issue of range anxiety, he adds that they still take a relatively long time to charge the vehicles.

 

Even for fast-charging vehicles such as an e6 BYD, the charge would still take about 40 to 45 minutes. Nonetheless, he is optimistic that the waiting time will be reduced with improving technology.

 

In April 2023, ComfortDelGro&rsquo s then-chairman Lim Jit Poh said the company expects to spend $6 billion to replace the fleet of its ICE taxis and buses with EVs. The amount is slightly over twice ComfortDelGro&rsquo s market cap of $2.9 billion on March 1 and about triple the group&rsquo s market value.

 

&ldquo The $6 billion was given because this is the group&rsquo s long-term spending. And that number includes all the capital expenditure replacements on a general basis,&rdquo says Cheng.

 

&ldquo If you look at what we spend on capex annually, on a normalised basis, we probably spend close to $400 million a year pre-Covid. With electrification, that means you add a little bit more because you need to build the infrastructure to support,&rdquo he adds. &ldquo But during the Covid-19 years, the numbers slowed because the fleet renewal was slower. That&rsquo s why we had $6 billion but that is a long-term number spread over 10 to 15 years.&rdquo

 

SINGAPORE&rsquo S planned changes to its regulations for the point-to-point transport services sector are expected to be a boon for the taxi industry &ndash particularly ComfortDelGro, : C52 -0.74% the Republic&rsquo s largest taxi operator, analysts said.

 

The government will update its regulations to lower operating costs of taxis and rationalise inspection regimes for taxis and private-hire cars (PHCs).

 

Firstly, the statutory lifespan of non-electric taxis will be raised to 10 years, up from eight years. This could translate to lower taxi rentals in line with PHC players, as taxi operators could recover the vehicle&rsquo s cost over a longer period, said RHB in a report on Wednesday (Mar 6).

 

Over time, this could lead ComfortDelGro to reduce or remove the rental rebates it offers taxi drivers to keep rentals competitive and attract drivers, RHB added.

 

Notably, the move could lower depreciation costs of assets, although ComfortDelGro could see higher initial capex outlay from the longer tenure of Certificates of Entitlement, DBS Group Research said in a separate report on Tuesday.

 

Next, taxis under three years old will require inspection once a year versus the previous frequency of six months. However, chauffeured PHCs over 10 years old will require inspection every six months versus the current frequency of once a year.

 

&ldquo This will not only minimise operational downtime for newer taxis but also lower maintenance costs for taxis in the first three years, allowing operators to keep new vehicle rentals competitive,&rdquo said RHB analyst Shekhar Jaiswal.

 

Although the proposal could lead to some drop in inter-segment revenue for ComfortDelGro&rsquo s automotive engineering division, which maintains the group&rsquo s fleet, it would still translate to lower taxi operating costs, he noted.

 

Meanwhile, the increase in the frequency of inspections could lead to higher operating costs for PHCs, translating to slightly higher rentals for older cars. That being said, the impact could be marginal, DBS said.

 

As part of the tweak in regulations, smaller taxi operators will no longer need to maintain call-booking services, as they only make up 1 per cent of all point-to-point trips.

 

ComfortDelGro, which fulfils 99 per cent of call-booking trips, will continue to offer the service. However, it may be allowed to operate on a leaner operation, which could reduce operating costs, noted RHB.

 

Both DBS and RHB have a &ldquo buy&rdquo recommendation on ComfortDelGro and target prices of S$1.67 and S$1.65, respectively. The transport group&rsquo s counter was trading flat at S$1.36 as at 1 pm on Wednesday.

 

Earnings meet expectations

Last week, the group posted a 76.5 per cent jump in net profit to S$102 million for the second half of 2023, supported by a 4.2 per cent revenue increase to S$2 billion.

 

This brought the group&rsquo s full-year net profit to S$180.5 million, up 4.3 per cent from S$173.1 million in FY2022. The results came as the group sustained improvements to its core public transport and taxi and private-hire segments throughout the year.

 

The results were mostly in line with analysts&rsquo expectations, who maintained &ldquo buy&rdquo calls on the stock.

 

Phillip Securities raised its target price to S$1.63 from S$1.57 after increasing its FY2024 earnings estimates, as it expects multiple earnings drivers for ComfortDelGro in the year ahead.

 

This includes higher platform fees and commissions for Singapore taxis, UK bus indexation and re-contracting, a large taxi fleet size in China, and margin recovery for Singapore rail operations as costs stabilise and rail passenger numbers grow.

 

Similarly, Maybank raised its earnings per share estimates for FY2024 to FY2025 by 1 to 4 per cent on contract renewals and fare indexation, which could improve ComfortDelGro&rsquo s margins.

 

In contrast, UOB Kay Hian lowered its profit after tax and minority interest forecasts for 2024 and 2025 as it expects lower overall margins. This led to a lower target price of S$1.58 from S$1.66.

TRANSPORT giant ComfortDelGro : C52 +0.74% (CDG) is plotting a course for growth by increasing its footprint overseas and venturing into adjacent businesses, but it is a strategy that will continue to be anchored by its operations in Singapore.

 

Over the past 12 months, CDG has made notable moves abroad.

 

In 2023, it acquired Australian taxi operator A2B for A$165.1 million (S$145.7 million). In February this year, it acquired CMAC Group, a UK-based ground-transport management and accommodation network specialist, for £ 80.2 million (S$135.4 million).

 

Through joint ventures with foreign partners, it has also secured an 11-year contract to operate and maintain the Stockholm Metro, as well as a six-year contract for a metro line in Paris.

 

Cheng Siak Kian, the managing director and group chief executive officer of CDG, told The Business Times that the group&rsquo s two key pillars will remain the taxi/private hire and public transport (which includes rail and bus) segments.

 

&ldquo We don&rsquo t have a specific target (for overseas earnings), but clearly the overseas proportion will continue to grow,&rdquo he said.

 

As at end-December 2023, 42.7 per cent of CDG&rsquo s revenue and 26 per cent of its operating profit came from outside Singapore.

 

Cheng said that this will vary in the future, as &ldquo a lot more earnings will be generated from overseas business, because that&rsquo s where the market is bigger&rdquo .

 

Its overseas rail ventures, such as the Stockholm Metro, would add to earnings but not the company&rsquo s top line as CDG is not a majority shareholder, he said.

 

Blessed with a generous war chest

The company certainly has the funds to keep growing inorganically. As at end-December, its cash and cash equivalents rang in at S$856.9 million, despite a drop of 11.4 per cent year on year.

 

&ldquo I think we have been blessed that when I took over, the balance sheet (was) very strong, and that has allowed us to grow the business through acquisitions,&rdquo said Cheng, who began his role on Jan 1, 2023, succeeding Yang Ban Seng.

 

&ldquo We&rsquo ve overcome some of the comments from our investors that we have a &lsquo lazy&rsquo balance sheet, with a little bit too much (cash).&rdquo

 

The deployment of the company&rsquo s war chest in acquisitions has been in a &ldquo very deliberate, very disciplined&rdquo manner, he said, adding that CDG closely examines whether such investments would be sustainable, how they would fit into its overall strategy, and how they would bring the best value to its shareholders.

 

While acquiring A2B is an instance of CDG expanding its taxi/private hire segment overseas, the CMAC purchase is a more &ldquo creative&rdquo move.

 

CMAC, which is a platform that helps airlines move passengers from airports to hotels, is one example of an adjacent business that will add growth to CDG, since it would be able to harness the group&rsquo s existing taxi and bus operations in the UK, said Cheng.

 

Singapore skills, different places

Cheng said that the company has continued to make in-roads in winning overseas rail tenders, which has been informed by its success in running rail projects at home.

 

In 2022, CDG commenced operation of New Zealand&rsquo s largest rail network, the Auckland Rail Franchise, through Auckland One Rail, a 50:50 joint venture with Australian rail operator and maintenance company UGL Rail Services.

 

The eight-year contract was valued at S$1.13 billion. It was also the first overseas heavy-rail venture by a Singaporean company.

 

Both the Swedish and French rail tenders represent new markets for CDG, and they are also operated as joint ventures with foreign partners. The Swedish tender is the company&rsquo s largest rail project outside of Singapore to date.

 

Cheng said that CDG&rsquo s value-add for its partners is its experience in the operation and maintenance of fully automated rail systems, especially in the area of building reliability, which it has gained from 20 years of running the North-East Line in Singapore.

 

&ldquo A lot of the expertise we generated, and a lot of our references are actually based on the fact that we have done well in Singapore,&rdquo he said.

 

&ldquo When clients around the world look at Singapore, they do see us as representing (Singapore&rsquo s excellence), so they expect us to bring that customer experience, reliability and innovation, and to share those with them as well.&rdquo

 

For the full year ended December, CDG posted a net profit of S$180.5 million, up 4.3 per cent from S$173.1 million in FY22. Full-year revenue rose 2.6 per cent to S$3.9 billion.

 

The group&rsquo s steady performance has not gone unnoticed by investors.

 

CDG generated total returns of 20.6 per cent in 2023. In comparison, the benchmark Straits Times Index (STI) returned 4.7 per cent over the same period.

 

So far this year, the stock has fallen 2.9 per cent but still outperformed the STI, which declined 3.3 per cent.

 

Out of nine analyst recommendations, the counter has eight &ldquo buy&rdquo ratings and one &ldquo hold&rdquo call.

 

RHB, for example, has a target price of S$1.60 on the stock, representing a 17.6 per cent upside to CDG&rsquo s closing price of S$1.36 on Mar 1.

 

RHB analyst Shekhar Jaiswal said in a recent report: &ldquo (CDG) should continue to see growth in 2024, aided by overseas public transport earnings Singapore rail ridership staying robust and strong taxi earnings amid the increase in fares and commission rates as well as the introduction of a new fee for bookings on the Zig platform.&rdquo

 

While the group seeks overseas expansion, Cheng said that Singapore remains a &ldquo very important&rdquo market for the company, having bidded &ldquo very competitively and very strongly&rdquo for the upcoming Jurong Region and Cross Island lines.

 

Singapore is still &ldquo the home base that we want&rdquo , said Cheng, adding that the group will continue to be anchored in Singapore.

 

&ldquo Our clients see that formula, or (standard operating procedures) that we have in Singapore, which can be used overseas. That forms the base for us, and will continue to be critical for us.&rdquo