ComfortDelgro – DMG

Fuel price strength dampened earnings, but 2010 earnings to jump on weak WTI price

CD recorded 3Q08 net profit of S$48.3m, down 18.1% YoY, despite a 5.2% YoY increase in turnover. 9M08 net profit of S$155.3m represents 78% of our raised 2008 forecast.

Global bus turnover fell a marginal 1.2% YoY to S$397m, but high fuel prices led to a more severe 36.1% YoY decline in bus operating profit.

• Singapore bus turnover expanded 8.7% YoY to S$156m, due to a 6.1% YoY ridership increase to 2,375k rides/day. But high diesel prices led to operating profit (inclusive of advertisement and rental income) falling 32% YoY to S$5.9m.

• UK Metroline recorded a 13% YoY turnover contraction due to the weaker Sterling Pound. The 64% YoY plunge in operating profit to S$8.5m was due to higher fuel costs and the benefit of a write-back of pension provision in 3Q07.

• Australia bus turnover grew 11.7% YoY to S$54.4m due to indexation of contract revenues, higher mileages operated and more charter work but was partly offset by the weaker Australian Dollar. Its operating profit of S$8.8m is up 3.5% YoY.

Mild growth for global taxi operations. Global taxi turnover was up 2.7% YoY to S$238m, though operating profit fell 16% YoY.

• Singapore taxi operating profit fell 29% YoY due to higher provision for accident insurance claims and higher diesel subsidies paid to taxi drivers.

• China taxi turnover rose 13% YoY to S$28.6m due to higher rentals on the newer fleet in Beijing and increases in fleets in Chengdu, Jilin and Nanning.

2010 earnings could jump on the back of lower fuel costs. High WTI crude oil price in 3Q08 contributed to the weakness in CD earnings. However, WTI prices has since fallen from Aug 08 monthly average of US$116.70/barrel to 1H Nov 08 average of US$61.70. This is positive for CD earnings going ahead. However, as CD has already partially hedged its fuel price till Jun 09, the expense reduction will be muted until 2H09. We are assuming WTI crude oil price of US$70/barrel for 2009 and US$63/barrel for 2010. However, given the price hedge, the effective price for CD is estimated at US$88/barrel for 2009 and US$63/barrel for 2010. We see this contributing to a S$75m YoY fall in energy and fuel costs for 2010, which is 22% of our forecast 2009 PBT.

Earnings forecasts have been adjusted. We raise our 2008 net profit forecast by 4% to reflect the recent declines in WTI crude oil price. Our 2009 net profit forecast remains unchanged.

Maintain BUY on CD. Our S$1.63 target price is derived from sum-of-the-parts valuation. CD also offers an attractive 2009 dividend yield of 7%. We believe further falls in WTI prices will be the catalyst for investors to relook at investing in CD.

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