ComfortDelgro – UOBKH

Playing The Recovery Theme

Playing the recovery theme. We like ComfortDelGro (CDG) for the two opportunities it offers for playing the recovery theme. The earnings recovery momentum derived from lower fuel expenses is set to continue for the rest of 2009. In 2010, we expect to see improved business conditions on the back of a sturdier global recovery to augment the effect of normalised margins, giving a more meaningful boost to earnings.

2009: Margin recovery on lower energy-related costs. Margins are already on the road to recovery on the back of significantly lower oil prices and the company’s fuel hedging programme that was put in place end-08. In 2Q09, EBIT margin recovered to 12.5% (+5.9ppt yoy), and net margin recovered to 7.6% (+3.8ppt yoy). By our estimation, the bulk of the savings in energy-related costs over 2Q08 flowed directly down to net profit.

2010: Turnover improvements augment effects of normalised margins. CDG is set to enter 2010 on healthier margins primarily from lower fuel cost. In addition, we expect increased corporate spending in the UK to help the company’s taxi business there, and the lifting of the temporary fare reductions and transfer rebates to return SBS Transit back to a normal level of performance.

Maintain BUY; target price raised to S$1.85. We have lowered our profit forecasts for 2009-11F by between -6.3% and -11.3%. We value CDG using discounted free cash flow to equity at S$1.85/share (COE: 6.4%; terminal growth: 2%). Our revised target price (up from S$1.76) gives a potential upside of 15.6% over the last closing price of S$1.60.

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