ComfortDelgro – DB

FY08 showing ridership growth and impact of oil

FY08 results above consensus and in line with our expectations
The company delivered a commendable set of results, with earnings declining by 10.3% YoY to S$200.1m on a 31.8% YoY increase in energy costs as the oil price hit a peak in 2008. We expect CD’s earnings to rebound in 2009 as the company could benefit from resilient ridership and moderating costs due to lower oil prices. We reiterate Buy on the stock and our TP of S$1.75.

Cut in dividend payout ratio to conserve cash for future acquisitions
CD has cut its DPR from 85% to 52% for FY08 as management wants to conserve its cash to seek opportunities for growth overseas. The company has a strong balance sheet with a strong FCF and is conserving its cash to have the flexibility for acquisitions. The company has a track record of acquisitions (it has acquired S$1.0bn in overseas assets) and has generated decent earnings from its offshore acquisitions. Listed transport companies in the UK are trading at single-digit multiples and as such could present attractive acquisition targets.

Watch out for a potential reduction in fares at the end of Feb09
We believe the government’s past actions in reducing fares in 1999 during the Asian Financial Crisis are indicative of actions they will likely take during the current recession. We have already factored in a potential cut in train and bus fares (through the introduction of a 5% rebate in FY09E) into our model. We would be buyers on weakness given the PTC’s potential fare reduction at the end of Feb09.

TP of S$1.75 implies 15.2x FY09E
Our DCF-derived TP is based on a COE of 8.0% and a TGR rate of 1.0%. Downside risks include: 1) increase in oil prices; 2) exposure to foreign exchange volatility; and 3) regulatory risks in both domestic and overseas ventures.

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