ComfortDelgro – DMG

Trading near trough valuations; BUY

1Q10 results in-line with ours and consensus expectations. ComfortDelGro reported 1Q10 PATMI of S$54.3m, up 3.4% YoY (+0.4% QoQ) representing 24% of our full year forecast of S$227m (consensus S$226m). The Group’s Australia bus and Singapore taxi operations registered remarkable EBIT growth of 90% and 22%, respectively. Maintain BUY, with a DCF-derived target price of S$1.78. Stock trades at a compelling 13.9x FY10 P/E multiple.

Rail continues to cannibalise bus ridership. In 1Q10, NEL rail ridership rose 12% to 0.4m (2009 growth: 5.5%). This is in contrast with the 0.9% increase in bus ridership. We believe the overlapping of inter-town bus service routes with MRT lines will continue to draw more bus commuters towards rail, due to the relatively faster journey times. We expect the cannabilisation process to continue with rail ridership growing by a stronger 10% in 2010 underpinned by tourism growth. In contrast, we expect bus ridership to decline by 2% and we have factored this into our estimates. Every 1% change in bus ridership could affect earnings by 0.9%.

Key takeaways from analyst briefing. Management expects: 1) Singapore bus revenue to decline in 2010 (we believe this is in view of fare reduction and weaker ridership due to the opening of CCL); 2) bus revenue from Australia to improve with additional services; 3) Singapore taxi revenue to increase with more cashless transactions and new replacement taxis; and 4) rail ridership in Singapore to continue to post strong growth.

Trading at lower range of its 13-20x trading band. ComfortDelGro trades at a compelling 13.9x FY10 P/E multiple, compared to SMRT’s lofty 19.6x P/E multiple. Despite the relatively challenging operational environment in its Singapore’s bus operations, we believe other business units such as Singapore taxis and rail as well as Australia bus operations will continue to underpin the group’s overall earnings. Recommend a pair trade: SELL SMRT (TP: S$2.00) and BUY ComfortDelGro (TP: S$1.78).

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