ComfortDelgro – OSK DMG
Potential Policy Changes To Bus Operations (BUY, SGD2.12, TP: SGD2.48)
ComfortDelGro’s 1Q14 PATMI rose 9.7% y-o-y to SGD63.3m on SGD950.8m in revenue (+9.2% y-o-y). This was in line, as its UK business continues to shine. The incoming Parliament meeting may announce changes that are favourable to the domestic bus operation. Thus, maintain BUY, with a higher TP of SGD2.48 (from SGD2.22) that is based on DCF (WACC: 9.0%; TGR: 2.5%) in view of the brighter outlook.
Overseas business drives growth. During the quarter under review, ComfortDelGro’s UK business saw its revenue and EBIT jump to SGD222.2m (+51.7%) and SGD19.6m (+90.3%) respectively. This was largely on the contribution from Metroline West along with synergies achieved in cost savings. This lifted EBIT margins by 1.8ppts to 8.8%. This was further aided by a strong GBP, which appreciated 10% against the SGD in the same period. As a result, the group’s overseas business accounted for 40% of its revenue and 51% of operating profit. Going forward, we expect ComfortDelGro’s UK business to continue driving the performance, although this should be partly offset by the weakening of the group’s Australian operation.
The domestic business remains weak but a new policy may be coming. Although core revenues for both ComfortDelGro’s bus and rail operations in Singapore increased to SGD165.9m (+7.2%) and SGD42.1m (+18.0%) respectively as a result of steady increases in ridership, both segments continued to register losses on rising operating expenses. In line with expectations, the Downtown line’s losses widened to SGD6.8m (+106% y-o-y), as we had expected the turnaround to only occur in 2016 when Stage 2 commences. Notably, management guided that the Government was likely to announce favourable changes in the upcoming Parliament meeting on 16 May. The changes would likely be linked to bus operations rather than for the rail refinancing framework.
Continue to favour ComfortDelGro over SMRT Corp. As the incoming changes are likely for bus operations rather than rail, we continue to prefer ComfortDelGro over SMRT Corp (MRT SP, SELL, TP: SGD1.00), given the former’s large exposure to the bus business.