ComfortDelgro – DMG

Earnings prospect remain bright

The weakness in crude oil prices is a positive for ComfortDelgro’s operating margin. Crude oil prices has trended below US$50/bbl in 1Q09, sharply lower than the high of US$134/bbl in Jun 08. This will lower operating costs and widen ComfortDelgro’s operating margins.

Singapore rail ridership seen to do well. Whilst Singapore bus ridership was flat YoY for the first two months of 2009, rail ridership rose 8.4%. We have conservatively assumed flat 2009 bus ridership and a respectable 7.4% rail ridership growth. Management indicated that its Singapore fleet of 15 thousand taxis has a low idle rate of 1%. For the 300 odd taxis mothballed in the LTA yard (which will be exempt from special diesel taxes), none of them are ComfortDelgro taxis.

Looking for more acquisitions in Australia. Australia accounted for 7% turnover share in 2008. The Australian cost-plus model is commercially attractive – increases in costs eg fuel and labour can be passed on to the government with a short one-month lag. This adds more certainty to margins. Growth in Australia is likely to come from acquisitions. ComfortDelgro will consider further acquisitions if the IRR is at least 7%.

Scope to expand in China. China accounted for 8% turnover share in 2008. ComfortDelgro currently operates in 12 Chinese cities, with Beijing taxi operations accounting for a sizeable 48% revenue share. ComfortDelgro runs 5.1 thousand taxis in Beijing. There is scope to expand the taxi operations in China via acquisitions of more taxi licences. ComfortDelgro sees China as
attractive given its operating margins of 20%+ and ROA of 8-9%.

Our S$1.78 target price is derived from sum-of-the-parts valuation. Share price catalysts include our forecast 32% recurring net profit increase for FY09, and an attractive FY09 dividend yield of 4.5% (based on a 55% payout ratio).

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