ComfortDelgro – DMG

Earnings hurt by high diesel costs, but forward earnings to grow as diesel costs fall

ComfortDelgro reported 2008 net profit of S$200.1m, down 10.3% YoY. This is in line with our S$198.3m expectation and consensus’ S$195m.

Turnover rose S$104.3m or 3.5%. Excluding the negative FX translation, turnover would have risen S$244.3m or 8.2%. This was driven by Australian business’ turnover surging 19.6% in AUD terms, and China business’ turnover rising 8.3% in RMB terms. The mild 0.9% rise in UK turnover (in GBP terms) was due to expansion in bus offsetted by taxi turnover reduction due to lower corporate bookings.

Lower fuel costs to drive 2009 and 2010 earnings. WTI price was fallen from 2008 average of US$100/bbl to the current US$36/bbl. Although ComfortDelgro has hedged 43% of its 2009 diesel requirements (at higher-than-current WTI prices), there will be cost savings from the balance 57% that is unhedged. We are assuming effective 2009 WTI price of US$63/bbl for ComfortDelgro, which will lower its 2009 energy costs by 30% from 2008 levels. We expect 2010 earnings to rise further on our assumption of 2010 WTI price of US$45/bbl.

Lower payout ratio to disappoint investors. ComfortDelgro declared a final dividend of 2.4S¢/share, giving a FY08 payout ratio of 52%. This is sharply lower than FY07’s 85% (which includes special dividend). The market is likely to be disappointed with this. Looking ahead, management said that they will payout more than 50% of its earnings.

We raise target price from S$1.63 to S$1.78, on the back of a lower market risk premium for our SBST DCF valuation. The other components of our sumof- the-parts valuation are obtained from PE valuation. Pending imminent announcement on fare cuts, investor interest may be more muted. But we b elieve investor interest will emerge thereafter.

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