ComfortDelgro – Phillip

Ridership update

Rail & Bus ridership up 16.8% & 7.6% in 1QFY11

Increasing cost of private car ownership to encourage the use of public transport

Singapore’s listco <20% of ComfortDelGro’s (CDG) value

Maintain Buy with target price of S$2.01

Ridership growth continues in Singapore’s Rail & Bus business

SBST’s rail ridership grew by 16.8% y-y to 42.5mn passengers, while bus ridership grew by 7.6% to 223.2mn passengers for 1QFY11. We believe that the North-East Line (NEL) will continue to record strong ridership due to the continued residential developments in the North-Eastern corridor. While we opine that SBST’s bus business faces long term challenges from Singapore’s growth in rail network, near term incentives to switch to public modes of transportation continue to aid its short term growth.

Disincentive for private mode of transport

We believe that the strong growth in both rail and bus ridership is a reflection of a structural shift in commuter’s choice from private to public modes of transport. Over the past 3 years, public transport fares remain largely unchanged, while the cost of private car ownership surged significantly by >20%. This is led by surging pump prices, as well as soaring COE prices. We opine that the cost of private car ownership will continue to stay high and result in significant switch from private to public transport.

Singapore is just one part of the Business

CDG offers a unique exposure to the global land transport business. CDG’s stake in SBST & VICOM, which gives the Group exposure to Singapore’s rail, bus and vehicle inspection & testing business, makes up <20% of the value in CDG. The remaining c.80% CDG comprise mainly of a growing global business. We attempt to account for the value in CDG by stripping out the value of two of its listed subsidiaries (list-co), SBST and VICOM, which CDG holds a 75% and 69% stake respectively. Despite a strong share price performance in the stock of VCM (+47%) and SBST (+13%) since the start of 2010, the stock price of CDG declined by 6% over the same period.

CDG ex-listco trades within a very tight P/E range

We examined the P/E valuation of CDG ex-listco over the past 5yrs and observed a very tight +/- 1 S.D. range of 16.3X-19.7X. If history is a good guide to the stock’s future performance, these mean reversion behaviour of the stock offers a range trading opportunity for investors. CDG ex-listco only twice traded significantly out of this range in the past 5 years: on the downside during the GFC (Oct-Dec08) and on the upside during the previous market peak (Apr-Aug07). Hence, we believe current valuation of 16.9X presents a good buying opportunity on CDG.

The Global expansion continues

CDG recently announced plans to set up its 3rd driving school, Chongqing Liangjiang ComfortDelGro Driver Training Co. Ltd, in China with an investment of RMB165mn (S$31.2mn). The new driving centre is expected to house 120 vehicles and has an initial capacity of 700students per month. The two existing driving centres, Chengdu ComfortDelGro Qing Yang Driving School and Chongqing ComfortDelGro Driving Training Co. Ltd, enrolled 4,200 and 9,660 students in 2010 respectively. At full capacity, we estimate that this new driving centre would contribute c.RMB12mn of revenue per year.

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. We kept our earnings estimates unchanged pending the release of 1QFY11 results on 13th May. With an upside of 30.8% to the last trading price, we maintain our Buy call on CDG.

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