ComfortDelgro – DBS

High fuel costs a speed bump

Story: 1Q08 net earnings were below expectations as it declined by 9.4% to S$50.2m despite top line growth of 5.8% yoy to S$749m. The Group was hurt by a weaker performance domestically, which saw operating earnings decline by 15% yoy, due mainly to higher oil prices that hit the Group’s bus business and Diesel sales business (via continued subsidies to taxi drivers). Meanwhile, overseas operations continue to fare well, posting both top and bottom line growth to account for 44.3% of total revenue and 47.1% of Group operating profit.

Point: ComfortDelgro can likely recover some of its margins from higher fuel costs by gradually increasing its diesel pump prices following a successful taxi fare hike. At the same time, the Group can also look forward to a likely fare hike with the PTC review in August, which should help lift domestic bus margins. This set of results does vindicate the Group’s strategy of growing its overseas businesses, which better maintained their margins due to the cost-plus model that is adopted, particularly by the bus operations. Factoring in lower margins, we have cut our FY08 and FY09 earnings forecasts by 8.2% and 7.5% respectively.

Relevance: We maintain our BUY call as we still believe in the Group’s long-term prospects and the Group’s strong balance sheet means there remains potential for earnings accretive acquisitions. CD offers an attractive prospective net yield of 5.5%. We roll over our valuation to 4.5% target net yield on FY09 eamings, giving a 1-year target of S$2.20.

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