ComfortDelgro – AmFraser

Growth opportunities support long-term prospects

• We initiate coverage of ComfortDelGro (CD) with a BUY rating. CD is trading at the lower-end of its PE band of 13x-18x. Our fair value of S$1.96/share is 17.3x FY10 PE, which offers a share price upside of 22%. Despite earnings volatility from forex moves (we factored in a 4% discount in deriving FV), we feel the potential of its overseas operations outweigh the volatility. Overseas contributions made up 42% of revenue and 39% of operating profit in 1H 2009.

• CD has established a strong foothold in the transport sector in its key markets of Britain, Australia and China. We expect CD’s good delivery of bus services in Britain and Australia to garner more of such contracts from the respective governments – while margins are protected to a large extent by pass-through clauses. These account for a combined 27% of group revenues and 23% of operating profit in 1H 2009.

• With its toehold in taxi operations across 11 cities in China, CD has yet to tap the full potential of the vast market in China. Continued acquisitions of taxi licences and vehicles – adding to its current fleet of 9,700 – will boost contributions from this segment. CD’s taxis in China contributed 12% to group operating profit – on margins of 31% – in 1H 2009.

• The train segment will be the spark for operations in Singapore. CD’s North-East line continues to enjoy stronger
ridership growth as it is less mature than SMRT’s older lines. Incremental ridership also flows through to the
bottomline as passenger load is below estimated 80% during peak times. CD is also a strong contender for the upcoming 40km Downtown Line – expected to be awarded end-2009 or 1H 2010. Taxi and bus earnings recovers in
FY09 from lower cost of diesel.

• A strong balance sheet with net gearing at a low 7% at 1H 2009 supports continued expansion overseas. But CD is adopting a conserve-cash approach this year amid the economic uncertainty, while maintaining dividend policy at 50% of net profits. This translates to a yield of 3%-4% p.a. Unless, opportunistic M&As come along, CD is likely to return extra cash to shareholders.

• On a negative note, after a sharp recovery in FY09 as a beneficiary of lower oil prices, our net profit forecast of 3%-4% p.a. for FY10-11 leaves little buffer from adverse currency rates. We estimate that a 5% appreciation in the S$ against the Pound Sterling, A$ and RMB, translates to a 2% reduction in earnings in each forecast year. In addition, about 15% of group cost structure is vulnerable to rising oil prices.

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