1Q results within expectations

At a Glance

• 1Q11 results within our expectations

• Margins lower on oil price, staff costs – as expected

• Higher oil prices already factored in our forecasts

• Maintain Buy and S$1.86 TP

Comment on Results

Results in line. Results for 1Q11 were within our expectations. Revenue grew by 4.7% y-o-y to S$803m while net profit declined 7.7% to S$50.1m. Revenue was driven by growth in all business segments especially from taxi, bus and rail, while the fall in earnings was a result of higher operating costs.

Higher operating costs weighed on margins, but within expectations. EBIT margin was 1ppt lower at 10.8%, dragged by higher oil prices, staff costs, lower average bus fares and currency translation losses. Higher oil prices resulted in increase of fuel and electricity costs (+18%), and diesel resale costs in material & consumables expenses (+26%). Staff costs (+4%) were higher as Job Credits ceased and increased staff hiring in Australia. Daily ridership for Singapore bus and rail increased by 7.6% and 17.3% y-o-y, but this was partially offset by a lower average fares due to distance-based fares. Balance sheet strengthened as net debt improved from 6.1% in 4Q10 to 4.4% in 1Q11, which continues to put the Group in a good position to pursue acquisitions.

Higher oil prices already factored in our forecasts. CD will continue to benefit from higher ridership and taxi fleet in Singapore. Management continues to hedge 20% of fuel requirements monthly. We have already factored in an average oil price of US$105/bbl in our forecasts, which is still above the YTD average price, despite the recent volatility. Successful bid for the Downtown Line may serve as a longer-term catalyst.

Recommendation

More attractively valued than SMRT, Maintain Buy TPS$1.86. We continue to like CD for its more attractive valuation and geographical diversity it offers in the land transport sector. CD currently trades at 13.6x FY11F PE compared to SMRT’s 18x FY11F PE. Our TP of S$1.86 is based on 15x FY11F PE and DCF (WACC 10%, t=1%).

ComfortDelGro posts 7.7% drop in Q1 profit

HIGHER costs for energy as well as materials and consumables were mostly to blame for ComfortDelGro’s net profit for the first quarter ended March 31, 2011 slipping 7.7 per cent to $50.1 million.

But Q1 revenue inched up 4.7 per cent to $803 million on broad-based growth in the group’s key businesses.

Earnings per share in the first quarter fell to 2.40 cents from 2.60 cents in the previous corresponding period. The group’s net asset value per share was 88.28 cents as at March 31, 2011, from 86.20 cents three months earlier.

Q1 operating profit fell 4.1 per cent to $86.9 million as operating expenses climbed 5.9 per cent to $716.1 million mainly due to the higher cost of materials and consumables, higher fuel and electricity costs, and an increase in staff cost and the absence of Jobs Credit in Singapore.

‘The inflationary pressures in the countries we operate will continue to impact our cost of operations,’ said ComfortDelGro managing director and group CEO Kua Hong Pak. ‘Fuel and electricity costs will remain high if prices continue on the current trend.’

ComfortDelGro is the world’s second-largest transport group and revenue from its overseas operations accounted for 41.8 per cent of total group revenue – down from 42.9 per cent in the same quarter a year ago. It is targeting 70 per cent of its total revenue from overseas in the medium term.

The group’s bus business led growth in Q1 by contributing 37 per cent of the increase in group revenue. This was followed by the taxi business (32 per cent), the automotive engineering services business (11 per cent), the rail business (10 per cent) and the vehicle inspection and testing business (6 per cent). The remainder of the revenue increase (4 per cent) came from the car rental and leasing, bus station, and driving centre businesses.

Revenue from bus operations in Q1 rose 3.5 per cent to $392.6 million, as overseas bus revenue continued to exceed those of the Singapore operations by accounting for $237.9 million or 60.6 per cent of total group bus revenue.

The taxi business saw revenue rise 4.9 per cent to $248.3 million on growth in the Singapore business and the inclusion of revenue from Swan Taxis in Perth, which was acquired in October 2010. The overseas taxi segment accounted for 28.1 per cent of group taxi revenue.

Rail revenue in Q1 increased 13.1 per cent to $32.5 million as average daily ridership on the North-East Line and the two LRTs increased. Adding rental and advertising income, total rail revenue grew 11 per cent to $35.4 million.

Looking ahead, ComfortDelGro sees Singapore bus revenue rising with ridership growth. Higher ridership and hence revenue are also expected from the rail business, while revenue from the Singapore taxi business is likely to increase with more cashless transactions and new replacement taxis.