ComfortDelgro – DBSV

Right on schedule

  • 2Q14 in line; 1H forms 49.5% of our FY14F estimates, DPS of 3.75 Scts declared
  • Expect stable growth to continue, aided by recent fare increases, ridership and acquisitions
  • Share price trading at 1.5 std deviation above historical average
  • Maintain HOLD, TP revised marginally to S$2.71

Highlights

2Q14 within expectations. 2Q14 net profit of S$75.7m was 9.9% up from a year ago, as revenue grew by 11.9% y-o-y to S$1.02bn, contributed by all business segments, notably buses (+S$80.3m) and taxis (+S$20m). Operating profit rose by 6.5% y-o-y to S$119.9m, a tad slower than topline due to higher operating expenses (+12.6% y-o-y) arising largely from higher staff costs (+17.3%), fuel & electricity (+25.6%) and premises costs (+26.9%). Operating margins slipped slightly to 11.8%, from 12.4% a year ago. An interim dividend of 3.75 Scts was declared (1H13: 3 Scts), equating to 57.6% payout ratio.

Our View

Stable growth to continue, though y-o-y rate in 2H could be a tad lower. Despite continued cost challenges, we expect management to continue delivering stable growth into 2H14 and FY15/16F, helped by recent fare increases and higher ridership in Singapore, and both organic and inorganic growth overseas. However, we currently expect 2H14 to see a slower y-o-y growth rate compared to that seen in 1H14 (+9.8%), due to a higher base in 2H13 (post-Metroline West acquisition in mid-2013) and lower contribution from Australia due to Sydney Metropolitan Bus Region 4 re-contract in August.

Acquisitions to continue; Blue Mountains Bus soon in the bag. CD recently announced that it had entered into an agreement to acquire Sydney-based Blue Mountain Bus Company for A$26.5m (S$30.8m), subject to regulatory approvals and due diligence. We were not surprised by this bite-sized purchase and view it positively as it will supplement the Group’s overall growth. We expect management to continue on this track to leverage on its strong balance sheet.

Recommendation

Maintain HOLD, TP S$2.71. We like CD for its diverse business and geographical exposure, and steady growth profile coupled with its opportunistic bite-sized acquisitions in areas which are familiar to management. However, we maintain our HOLD recommendation, given limited upside and with its valuation at 19x FY15F PE, which is c.1.5 std deviation above its historical mean. Our forecast is tweaked up marginally by 1.3% on lower minority interests, resulting in a revised TP of S$2.71. We will turn into buyers at c.S$2.40, which implies >10% upside to our TP.

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