ComfortDelgro – UOBKH

Earnings To Be Driven By Overseas Operations

Overseas operations to drive earnings in the long term. CD recorded 46% of its revenue from overseas operations for 9M07. Management is targetting to raise this to 50% over the next two years. China may account for a relatively small 7% revenue share currently, but both organic and inorganic expansion could raise this share significantly. In addition, China taxi operations offer an operating margin of 31%, almost treble CD’s overall operating margin. As China revenue share increases, margins should also widen.

Singapore bus and rail ridership rising. Anecdotal accounts indicate the mid-Dec 07 hike in taxi fares has led to increased ridership for both bus and rail lines. We have factored in greater economies of scale, wider margins and higher earnings.

Strong operating cash flow to keep dividend high. CD has consistently generated operating cash flow in excess of S$500m p.a. for the past few years. As earnings expand, cash flow generation could strengthen. We are forecasting 2007 dividends of 10.5¢, which gives a 7% yield.

BUY with a S$2.46 target price based on our sum-of-the-parts valuation model, comprising the following: a) S$0.30 discounted cash flow valuation for Singapore bus and rail operations, and b) S$2.16 from 2009 PE valuation for other businesses.

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