ComfortDelgro – Phillip

Strong set of results

1Q10 revenue came in at S$766.9m (+7% y-y) while net profit was up 3.4% y-y to S$54.3m, both were slightly ahead of our expectations

Australian bus business continues to contribute strongly and there were improvement in the Singapore and UK taxi businesses

Upgrading our revenue and net profit estimates by 2% and 6.8% to reflect the strong growth by the Australia business and the recovery of the UK business

Upgrade to BUY from Hold with a target price of S$1.73 1Q10 results were slightly better than our estimates

Revenue was up 7% y-y to S$766.9m due to broad-based growth across the various business segments, representing about 24.7% of our FY10 estimates. Operating profit was up 11.2% y-y to S$90.6m due to the increase in revenue and positive FX translation effect while operating margin also improves slightly to 11.8% from 11.4%. Net profit came in at S$54.3m (+3.4% y-y), representing about 30% of our FY10E estimates.

Upgrading our revenue and net profit estimates for FY10

We are upgrading our revenue and net profit estimates for FY10 by 2% and 6.8% to S$3.17b and S$193.5m respectively to reflect the better performance from most of the business segments especially the Australia business. Operating costs remain fairly stable especially fuel costs, crude oil has fallen from US$85 to US$76 due to the ongoing debt crisis in Europe. Management updated us that they will continue to hedge their crude oil requirements to manage their operating costs effectively.

Outlook for the rest of the year

The recovery of the Singapore economy coupled with the opening of integrated resorts will contribute strongly to the growth of their Singapore taxi business for 2010. We see the Australia bus business continue to grow strongly in 2010 and we are forecasting revenues to increase 10% y-y to S$304m. Rail riderships in Singapore will likely see double-digits growth for the year as the increased connectivity and introduction of distance-based fares will encourage more commuters to switch to the rail network. However we see the Singapore bus business continue to suffer with the progressive opening of circle line and we see average fares for buses falling further as commuters will rely more on the rail network and hence shorter journeys on the bus.

Valuation and Recommendation

We are upgrading our price target for CDG to S$1.73 from S$1.68 to reflect the better outlook for the UK business and improvement in the Singapore taxi business. CDG has fallen 5.7% to S$1.49 since our downgrade on 11th February, we feel that the current price of S$1.49 represent a very good opportunity for investors who wish to have exposure to land transportation sector. Our DCF model is based on a RFR of 2.7%, 10.5% market return and 1% terminal growth.

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