ComfortDelgro – DBS

Things Can Only Get Better

Story: Excluding an exceptional gain of S$26.5m, Comfort Delgro’s 2Q08 results were below expectations, due mainly to the high cost of fuel dampening domestic earnings. Core profit in the quarter fell by 48% yoy to S$30.3m on top line growth of 6% yoy to S$785m. At half-time, core earnings fell by 29% yoy to S$80.5m on revenue expansion of 6% to S$1.5bn. An interim dividend of S 2.6cts was declared.

Point: Whilst overseas margin held up quite well at 9.7% at half-time vs 10% a year ago, CD’s domestic bus and diesel sales operations were adversely affected by significantly higher fuel costs, bringing down domestic margins from 12.3% a year ago to 7% as at 1H08. Turnover growth, on the other hand, was driven by higher ridership domestically (+10% yoy), whilst overseas operations only showed a modest growth (+1% yoy). Factoring in lower margins for the Group’s bus operations and diesel sales business, as well as the S$26.5m exceptional gain in 2Q08, we have lowered our earnings forecasts for FY08 and FY09 by 9% and 15% respectively.

Looking ahead, with oil prices having eased off in recent weeks and the potential of a fare hike coming through, we are optimistic that margins over the next few quarters will improve.

Relevance: We maintain our BUY recommendation, as we believe core earnings can show improvement over the next few quarters, with a target price of S$1.90, adjusted to reflect our lower earnings and dividend forecasts. Our target price is still based on a target net yield of 4.5% for FY09, translating to c. 18x FY09 earnings. CD’s balance sheet remains healthy at less than 0.1x net gearing and there remains the potential for further overseas expansion or acquisitions to drive the Group’s long-term growth.

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