ComfortDelgro – BNP

ComfortDelGro delivered a 15% y-y increase in 3Q07 net profit. The group’s foray into the land transportation services overseas offers potential for significant earnings growth. We like the stock for its accretive overseas operations. We maintain our BUY rating and TP of SGD2.50.

Growth within expectations 3Q07 earnings in-line

ComfortDelGro’s earnings were in-line with our expectations.
The 3Q07 net profit rose 15% y-y to SGD59m on the back of strong contribution from its overseas operations. Growth was broad-based, with all major operations chalking up increases in turnover, in particular the group’s bus operations. EBIT gained 14.4% y-y to SGD93m while EBIT margin was up to 12.1% in 3Q07 from 11.2% in 3Q06.

Overseas bus operations continue to shine
The group’s bus revenue and EBIT rose 10.6% y-y and 12.6% y-y, respectively. Weaker Singapore bus EBIT was offset by stronger overseas bus EBIT in both UK and Australia, which grew by 37.4% and 117.5% y-y, respectively. The surge in overseas bus EBIT was largely due to higher contracted rates and higher mileages operated in both UK and Australia. EBIT contributions from its overseas bus operations rose to 80% in 3Q07, from 60% in 3Q06.

Taxi and rail operations posted good growth
Taxi revenue and EBIT rose 6% y-y and 28.4% y-y, respectively. The sterling performance was largely boosted by stronger Singapore operations, which saw better corporate accounts and higher rentals from new Sonata taxi fleet. As for the group’s Singapore rail operations, we expect to see further improvement in view of the steady increase in rail ridership. The group posted an operating profit of SGD2.3m in 3Q07, up 15% y-y.

Potential to unlock more value from overseas – BUY
In our view, the group’s overseas operations will remain key to its overall earnings growth. The recent spikes in oil prices had minimal impact on earnings as energy and fuel costs account for only 8.4% of total operating expenses. We have kept our FY08 earnings estimate unchanged. We have arrived at our DCF-derived target price assuming a WACC of 6.6% and a terminal growth rate of 2%. Our target price is based on 2008 P/E multiple of 20x, in line with that of major transport operators in the region. We maintain our BUY rating and target price of SGD2.50.

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