ComfortDelgro – Kim Eng

Taking a Swan dive Down Under

What’s New

• ComfortDelgro is bidding to enter the Australian taxi market via an A$38.8m acquisition of Swan Taxis, the largest taxi operator in Perth, Western Australia. Priced at 13x earnings vs ComfortDelgro’s 1415x, this sounds like a good move in our view as it will be buying into a profitable company with a long operating history. It is also a natural extension of its bus businesses in Sydney and Melbourne. Maintain BUY with target price at $1.87 pending the completion of the deal.

Our View

• Swan Taxis is highly profitable with an EBIT margin that exceeds 30%, compared to ComfortDelgro’s 1112%. It is also practically zero debt and is in a strong net cash position. ComfortDelgro’s offer values Swan at earningsaccretive levels.

• Growth prospects for Swan are excellent, in our view, as the population of Perth is expected to hit 2.2m by 2025, from 1.7m now. In fact, Perth’s population growth of 3.2% last year, driven by foreign immigration and interstate migration, made it the fastestgrowing city in Australia. The demand for taxi services is thus expected to

intensify.

• If the acquisition succeeds, we expect ComfortDelgro’s FY11F12F earnings would improve by 1.52% and our fair value would increase from $1.87 currently to $1.90. The deal is likely to take three months to complete, subject to approval by the Australian Competition and Consumer Commission. Pending its completion, we are maintaining our forecasts for now.

Action & Recommendation

Pending the completion of the acquisition, we maintain our forecasts and target price of $1.87, based on 17x FY10 forecast. Maintain BUY.

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