ComfortDelgro – DBS

A more scenic ride from hereon

Story: After a steep drop in 2Q, ComfortDelGro’s 3Q results, while falling 18% y-o-y, were within our expectations. Net profit ended at S$48.3m on a turnover of S$803.5m. Excluding the S$26.5m exceptional gain recognized in 2Q08, 9M08 recurring net profit was down c.25% y-o-y. YTD net profit of S$155.3m now forms 75% of our full year estimates.

Point: Turnover from Singapore ops (+16% yoy) was driven largely by higher ridership for its bus and rail, and taxis operations. Overseas turnover dipped 7%, largely due to a weaker GBP, AUD and fewer taxi trips from corporate accounts. The expected net profit fall in 3Q was largely a result of high crude oil price which registered an average of c.US$118/bbl, offset by lower depreciation, leasing charges and other operating expenses.

Cashflow remained healthy, with the Group generating a net operating cashflow of S$141.9m.

Relevance: We believe negatives – high crude oil price, weaker GBP, AUD – have been priced in. Going forward, with crude oil price more than halved from July’s peak, and at under US$60/bbl now, we can expect to see improvements in margins for CDG. We have assumed an average crude oil price of US$100/bbl for FY08 and US$80/bbl for FY09. Except for an impact from a weaker UK taxi business, we expect the Group’s turnover to remain relatively firm.

Maintain Buy, TP: S$1.59. Our DCF valuation is S$1.83 (WACC 10%, terminal growth 1%), equating to 21x on FY08F EPS. But, this is at the higher range of its historical trading band and with the focus on near term earnings we pegged our TP to its historical mid-point average PE of c.15x instead. With its strong balance sheet, healthy operating cashflow and net cash position, we believe it is in an enviable position to acquire assets during testing current times.

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