ComfortDelgro – CIMB
Multiple avenues of growth
• Maintain Outperform with higher target price of S$1.90 (from S$1.83). Daily ridership for ComfortDelgro’s trains and buses has been rising almost every month since the start of the year. We keep our earnings estimates but raise our DCF-based target price to S$1.90 (WACC 8.0%) after rolling forward to CY12 and re-aligning discount rates with house rates. Trading at 13x CY11 P/E which compares favourably with its 3-year P/E average of 17x and SMRT’s 19x CY11 P/E, we believe currency risks have been priced in and recommend a switch to ComfortDelgro from SMRT. We see catalysts from higher-than-expected dividend payouts.
• Steady domestic outlook; overseas growth potential. Daily ridership for Comfortdelgro’s trains and buses has been rising almost every month since the start of the year. We see potential for ridership and margin expansion for its rail operations. Steady demand for taxis from prospective hirers could also prompt an expansion of its taxi fleet. While ComfortDelgro’s overseas ventures are not as sizeable as its local operations on an individual basis, we are positive on their higher margins and growth opportunities.
• Valuation gap. ComfortDelgro has been trading at an average discount of 18% (forward P/E) to SMRT since the start of 2008. The discount, however, has widened in 2010, arguably stemming from optimism over the new Circle Line. While SMRT’s share price has corrected slightly in the past two months following disappointments with Circle-Line ridership, ComfortDelgro still trades at a 30% discount to SMRT, despite its improving outlook vs. a loss-making Circle Line for SMRT.