ComfortDelgro – UOBKH

1Q08: Net Profit Down By 9.4% yoy, Hit By Soaring Fuel Costs

1Q08 results below expectation. 1Q08 net profit of S$50.2m was 9.4% lower yoy mainly due to soaring fuel costs. Turnover grew 5.8% yoy to S$749m in 1Q08. Australia was the strongest growth market with a 35.9% increase yoy while the UK market’s revenue slipped 4.7% yoy. Singapore registered a laudable 9.2% yoy increase to S$420.3m, thanks to an increase in both bus and rail ridership. Overseas markets contributed 44% and 47% of total revenue and operating profit respectively.

Bus operations still hurt by volatile fuel prices. CD has not hedged against rising costs since 4Q07, so it is subject to the volatility in fuel prices. We are assuming a full-year price increase of 30% in our model. Singapore bus operations are likely to be hit by soaring fuel costs, but the impact should be mitigated by increasing ridership and fare adjustments. CD’s overseas bus operations to withstand diesel price volatility better thanks to the price adjustment elements built into their contracts, despite a time lag when passing on the cost hikes.

Mixed taxi performance ahead. We believe the taxi fare hike in Singapore has helped taxi drivers increase earnings and therefore maintain CD’s taxi hire-out rates. However, diesel sales to subsidize taxi drivers will continue to hurt CD’s margin under current environment. CD’s taxi operations in China will continue to grow, partly due to an acquisition in Nanjing which was completed in 2007. CD has also guided that the demand for taxi services in the UK market should continue to be affected by the slowdown in the financial sector in London.

Downgrade to HOLD. We value CD at S$1.89 based on the sum-of-the-parts method. We reduce our fair price and earning forecasts to reflect the negative impact of soaring fuel prices and the lower revenue contribution from the UK. We still like CD’s global exposure and decent dividend payout, and suggest accumulating the stock at S$1.65 or below.

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