ComfortDelGro's Australian IPO could go both ways for shareholders
COMFORTDELGRO Corporation is pursuing an initial public offering of shares in its wholly owned Australian land transport subsidiary, in a move it hopes will unlock the value of its business assets Down Under. The listing of this unit on the Australian Securities Exchange could go two ways for shareholders of the group.
ComfortDelGro Corp Australia, the entity to be floated, operates a total fleet of over 4,400 vehicles in New South Wales, Victoria, Western Australia, Canberra, the Northern Territory and Queensland - making it one of the largest privately owned bus operators there.
The terms and structure of the listing are subject to prevailing market conditions and approvals, but CGS-CIMB analysts have estimated that the listing could boost the price of ComfortDelGro's Singapore-listed stock to between S$1.83 and S$2.15.
The counter closed S$1.64 on Monday, one Singapore cent higher.
Since venturing into Australia 16 years ago, ComfortDelGro has invested S$1.17 billion there. Australia is the group's single largest overseas investment destination.
After announcing in May that it was seeking to unlock value at its Australian business, ComfortDelGro has actually gone on to make another acquisition in July to expand its bus operations in Queensland.
The investments in Australia have paid off handsomely for the group. Profit contributions from Australia have risen steadily over the years.
Australia contributed 13.2 per cent of the group's revenue and 14.6 per cent of its operating profit in 2018. In the first half of FY2021, Australia contributed 20.3 per cent of its revenue and 28.2 per cent of its operating profit.
CGS-CIMB analysts noted that Australia was the best performing overseas location for the group in 2020, despite the pandemic and bushfires.
And although revenue contributions from Australia have been smaller than contributions from ComfortDelGro's United Kingdom and Ireland businesses, operating profit from Australia has been larger in recent years.
A spin-off would, therefore, reduce ComfortDelGro's holding in what some might consider a gem of a business.
While shareholders might profit in the short-term if an IPO results in the return of some cash via a special dividend - a purely speculative possibility at this point - the real benefit would come from a re-rating of ComfortDelGro's shares.
The rise of ride-hailing providers such as Uber and Grab has had a negative effect on ComfortDelGro. The counter had traded above S$3 in 2015 and 2016, but has struggled to reach such heights since.
During those better days, ComfortDelGro was valued at over 20 times forward earnings. Currently, Bloomberg shows the shares trading at 15.8 times estimated earnings on a blended and adjusted 12-month basis.
Some might argue that is already a rich valuation. Among transit operators, few command comparable valuations. London-listed FirstGroup, which has bus and rail operations in the UK and United States, does trade at about 20 times forward earnings. But others, such as The Go-Ahead Group and National Express Group, have either comparable or lower valuations.
But ComfortDelGro is also one of only a few transit operators globally that is currently profitable. Also, the company is investing in new technologies including electric vehicles. It has regrouped its private transport and lifestyle businesses into one division, as it believes that would allow for a more focused approach in the development of novel and sustainable mobility solutions using digital technology and clean energy.
Should the company be accorded a premium for its efforts?
These investments will take time to generate enough returns to offset the sizeable reduction in earnings contribution from Australia post-flotation.
Meanwhile, it has recently secured a S$1.13 billion contract to operate rail services in Auckland, marking its maiden venture into New Zealand. But its cab business here is still in the doldrums, no thanks to continued pressure from ride-hailing rivals and the pandemic.
How much investors cheer the listing in Australia will come down to their patience and the valuation of the Australian unit.
