ComfortDelgro – Phillip

Buying in at trough valuations

Current valuation for the stock overly pessimistic

Defensive stock for uncertain times

Trading at discount to closest peer

Forex remains the key risk to our forecasts

Maintain Buy with target price of S$2.01

A defensive stock for uncertain times

Being a land transport operator, we opine that ComfortDelGro (CDG) has valuable defensive characteristics against a backdrop of uncertain economic environment. Currently, we see relatively little downside risk to our profit growth estimates of 2% for FY11. In fact, the company’s bus business could even see improved profitability resulting from lower oil prices in a global economic slowdown. Majority of the company’s business are non-discretionary and are fairly resilient against a weakening economy.

Undervalued against closest peer

While SMRT and CDG are not directly comparable due to their varied business exposure, their valuation remains the benchmark to the land transport sector on the SGX. CDG currently trades at a discount to its closest peer, SMRT, when compared using the P/E and P/B multiples. Even with our conservative payout ratio assumption of 55% for CDG, the stock offers a fairly similar dividend yield of 4.5% with SMRT.

Key risks lies in forex

With its global exposure, the key risk for CDG lies with potentially lower earnings from weaker forex translation. We estimate that CDG has the highest forex operating profit exposure to AUD (c.20%), GBP (c.13%) & RMB (c.11%) and would be negatively impacted by a depreciation of these currencies against the SGD.

Trading at only 12X T12M EPS

CDG’s share price continues to drift lower in line with the weak market sentiments. We view current market valuations of merely 12X T12M EPS as overly pessimistic, considering the historical +/- 1S.D. P/E range of 13.5 to 16.6X. Even during the GFC, CDG traded below current valuations for less than a fortnight in Oct-Nov 2008.

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. CDG could potentially return 52.1% after incorporating our forecasted dividends of 6.1¢ over the next 12months. Hence, we maintain our Buy call on CDG.

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