ComfortDelgro – Phillip

Latent potential with overseas venture

Strong potential with CDG’s venture overseas

Limited exposure to energy price increase

NEL should continue to perform well; stronger than expected overseas performance is the wild card

We revised our PATMI estimates upwards for FY11E by 5.6% and introduce FY12/13E estimates

Maintain Buy following a change of analyst with revised target price of S$2.01

INVESTMENT MERITS:

Global diversification. We believe that CDG’s efforts to grow its businesses beyond Singapore could lead to significant earnings growth in the future. It also reduces their dependency on the Singapore market, which has a limited scope for land transport growth.

NEL likely to do well. CDG’s rail system serves the populous areas in the North-East of Singapore. We expect continued population growth to increase ridership for their rail business.

Limited exposure to energy price increase. Exposure to energy cost is a typical concern of investing into transportation businesses. However, we believe that CDG is less exposed to potential energy price increase than its peers due to their diversified businesses and varied business models.

Licenses & Operating rights protect competitive position. We observed sustainable profitability at some of CDG’s overseas subsidiaries, which we believe could be attributable to a protected competitive position.

KEY CHALLENGES:

Singapore Bus. We expect CDG’s bus business to be affected by the growth of rail network in Singapore. Plans to extend Singapore’s rail network to 270km by 2020 is likely to result in significant cannibalization of ridership from bus operations. With a 75% market share, we foresee long term challenges for CDG’s public bus operations in Singapore. CCL’s full opening at the end of 2011 will be the near term headwind for the company.

M & A. CDG aims to derive 70% of its revenue from overseas in the long run. While we are supportive of its venture overseas, we believe that there are inherent challenges and risks in growing their businesses overseas.

Key Risks. Regulatory; Forex; M & A.

Valuation. The current market price values the stock at 14X T12M EPS, which is at the lower end of the stock’s historical trading range. Due to our expectations of robust growth in the near future, we opine that the stock deserves an above average valuation. We used a blended valuation model of DCF (COE: 8.2%, terminal g: 1%) and P/E (17X FY11e PATMI) to arrive at our target price of S$2.01. With an upside of 33.4% to the last trading price, we maintain our Buy call on CDG with a revised target price.

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