ComfortDelgro – DMG

Hurt by Energy Costs, But Valuation Attractive

High crude oil prices will mean increased energy and fuel costs for CD. WTI crude oil price has risen from an average of US$72.4/bbl in 2007 to US$111.1/bbl in 1H08, or an increase of 53%. It even exceeded US$140/bbl briefly at some point in Jul 08, before moderating slightly to the US$130 level. We have increased our forecast of 2008 CD energy and fuel costs by 27% to S$320m, giving a YoY increase of 48%. This will lower CD earnings.

Rail ridership growth is in the mid-teens. For the first five months of 2008, SBS Transit’s (subsidiary of CD) rail ridership recorded a 15% YoY expansion. We attribute this to two main reasons :

• Growing population in the north-eastern part of Singapore – SBS Transit operates the North-east Line, which links commuters from the north-eastern part of Singapore to the city in the south.

• Dec 07 taxi fare hike – there was a knee jerk reaction whereby commuters switched from taxis to buses and rails in the initial months.

Bus ridership also rose moderately. SBS Transit bus ridership rose a moderate 6% YoY for the first five months of 2008. Though this is weaker than the rail ridership increase, it is stronger than the 4.3% bus ridership growth recorded in 2007.

Fare hike adds to revenue expansion. Collectively, Singapore bus and rail accounts for 16% of CD 2007 operating profit, and ridership growth will drive revenue expansion. Another positive is the mid-Jul 08 Public Transport Council announcement of a maximum fare hike of 3% for 2008 – our analysis shows that a 1% rise in fares will raise CD net profit by 1.8%. Overall, however, the effects of firm energy costs are more severe, and we have therefore lowered our core earnings forecast.

One-time gain from restructuring. In mid-Jun 08, CD announced that it will increase its stake in Cabcharge Australia through a share swap agreement. With this agreement, the following key changes will take place:

• CD’s stake in Cabcharge will increase from 5.0% to 7.46%;

• CD will transfer 16% of its shares in subsidiary CityFleet UK to Cabcharge – CD will thereafter retain a 51% stake in CityFleet while Cabcharge will hold a 49% stake.

An exceptional gain of S$26.5m (tax-free) will result from this transaction.

Target price cut to S$1.85. We are cutting our core 2008 net profit forecast by 14% to S$191.6m. Inclusive of the one-time gains, our 2008 net profit forecast is S$218.1m. Our 2009 net profit forecast has similarly been reduced. Our target price for CD, which is derived from sum-of-the-parts valuation, is being cut from S$2.00 to S$1.85. Despite this, we maintain BUY on CD, given its very attractive 2009 dividend yield of 7%.

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