ComfortDelgro – Kim Eng

Steady performer

Event

• ComfortDelgro reported inline 2Q10 results. Net profit rose by 1.6% YoY and 7% QoQ, powered by the Australian bus operations (+34%), the China driving centres (+15.5%) and the Singapore rail (+15%), taxi (+9%) and bus (+4%) services. The bottom line was hardly affected by forex translation as the weakness in the pound and the renminbi was offset by the strength in the A$. Operating margin improved despite

higher energy costs as revenue rose faster than overall operating expenses. Interim dividend was higher at 2.7 cents a share.

Our View

• ComfortDelgro’s train and taxi services in Singapore will continue to thrive on the Republic’s vibrant tourism scene. Train revenue in 2Q responded well to a 14% jump in ridership on the North East Line, which ends at HarbourFront and Punggol. The taxi division benefited from more cashless transactions and a larger fleet despite pricier certificates of entitlement as scrapping of older taxis was delayed.

• We expect relatively benign energy cost and currency risk this year, with the 22% jump in diesel and electricity costs so far offset by revenue growth (opex up only 3.9%). We expect Comfort will be able to hedge its diesel requirements at lower prices with the recent fall in crude. Similarly, it has US$ and the pound covered at good rates.

• More investments in Australia are being planned. The bid for Swan Taxi in Western Australia will continue until midSept. Two weeks into the bid, it already has 40% of the 90% acceptance needed. It will also require the nod from the Australian Competition and Consumer Commission. If successful, we expect a 1.5% boost to FY11 earnings.

Action & Recommendation

We maintain our BUY call on ComfortDelgro with a target price of $1.87, conservatively pegged to 17x currentyear earnings. We expect earnings upside ahead, with catalysts from improvement in the UK economy and more acquisitions overseas, especially in Australia and China.

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