ComfortDelgro – DMG

Highlights from 2Q12 results luncheon

We hosted ComfortDelGro (CD) for a post 2Q12 results luncheon. Management’s tone was positive: (1) Continues to see opportunities in Singapore taxi market (2) Confident in meeting taxi availability standards (3) BSEP to have neutral impact to CD’s earnings (4) China and Australia are targets for future expansion.

Well positioned as the dominant Taxi player in Singapore. Management shared that despite rising COE prices, it still believes in opportunities for growth in Singapore’s taxi market in the form of cashless transaction volumes and taxi bookings. CD has not increased rental rates for its newest batch of taxis and believes that operating margins of 11-12% still makes it an attractive business to hold on to.

CD likely to have less difficulty meeting taxi availability standards. On recent steps the government is taking to improve taxi availability, CD shared that about 80% of its taxi fleet runs on two shifts (two drivers sharing rental of one taxi). It believes that its performance on taxi availability standards would likely exceed the rest of the industry that is likely to have less than 50% of fleet running on two shifts.

“Earnings neutral” in Bus Services Enhancement Programme (BSEP). CD notes that although the government will be paying for buses as well as operating expenses under the BSEP, these will be taken onto CD’s books under assets and balanced with a liability to the government. A revenue grant will also be provided to offset against the depreciation of these assets.

Though CD will benefit from cost efficiencies from the increased fleet size, the government will charge CD its share of cost on an average cost basis. The recent increase in bus driver wages will also be borne by the government and there will not be anymore wage increase in Jan 2013. The BSEP is expected to have a neutral impact to CD’s earnings and CD could receive reimbursement through various income streams such as waived depot charges.

China and Australia targeted for expansion. CD has highlighted China and Australia as possible destinations for overseas expansion opportunities. Management commented that acquisitions should ideally range between S$50-S$100m but added that even a more sizable transaction in the likes of a few hundred million dollars would be achievable. CD targets investments that can generate an IRR of mid teens over a 10 year period.

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