A BETTER YEAR IN 2013

• Operating environment turning favourable
  
• Growth prospects in the pipeline
  
• Deserves upgrade to BUY
  

CD deserves rating upgrade

Recent comments by the Transport Minister have compelled us to revisit our conservative growth assumptions for ComfortDelgro (CD). As a result, we increase our fair value from S$1.60 to S$1.90, which raises our rating to a BUY from HOLD previously.

Local pressures to dissipate

Previously, our main issue against raising our valuation for CD was the weakness in SG bus operations especially with declining average fares and rising operating expenses i.e. wages. However, the onset of the Bus Services Enhancement Programme (BSEP) and its associated subsidies – and the increased likelihood of a fare revision in 2013 – point to a gradual turnaround for this segment in FY13.

Favourable fuel outlook

Despite geopolitical tensions in the Middle East, a lack of supply concerns has kept fuel prices subdued at current levels, and this trend is likely to extend into 2013. With substantial hedges in place – 40% of its diesel requirements for Singapore and the UK as well as 60% of its electricity needs – CD is well-positioned to benefit further from any additional dips and its profitability should remain supported.

Greater growth potential locally & abroad

Beyond FY13, CD has better prospects in its pipeline that will aid growth down the line. For instance, stage-one of the Downtown Line (DTL) will be operational in FY14. Although it will encompass only six stations, it will service the high-traffic regions of the CBD, Bugis and Chinatown. Internationally, a series of acquisitions and strategic moves will allow CD to continue enjoying stable revenue and operating profit contributions.

Fair value raised to S$1.90

Rolling our valuations forward to include FY14, we raise our revenue growth projections to 8% from 4% previously. In addition, we lower our operating expenses estimates i.e. fuel and electricity costs correspondingly. Maintaining our 50% of PATMI dividend payout forecasts, our DDM-based valuation increases to S$1.90. Upgrade to BUY.

A BETTER YEAR IN 2013

• Operating environment turning favourable
  
• Growth prospects in the pipeline
  
• Deserves upgrade to BUY
  

CD deserves rating upgrade

Recent comments by the Transport Minister have compelled us to revisit our conservative growth assumptions for ComfortDelgro (CD). As a result, we increase our fair value from S$1.60 to S$1.90, which raises our rating to a BUY from HOLD previously.

Local pressures to dissipate

Previously, our main issue against raising our valuation for CD was the weakness in SG bus operations especially with declining average fares and rising operating expenses i.e. wages. However, the onset of the Bus Services Enhancement Programme (BSEP) and its associated subsidies – and the increased likelihood of a fare revision in 2013 – point to a gradual turnaround for this segment in FY13.

Favourable fuel outlook

Despite geopolitical tensions in the Middle East, a lack of supply concerns has kept fuel prices subdued at current levels, and this trend is likely to extend into 2013. With substantial hedges in place – 40% of its diesel requirements for Singapore and the UK as well as 60% of its electricity needs – CD is well-positioned to benefit further from any additional dips and its profitability should remain supported.

Greater growth potential locally & abroad

Beyond FY13, CD has better prospects in its pipeline that will aid growth down the line. For instance, stage-one of the Downtown Line (DTL) will be operational in FY14. Although it will encompass only six stations, it will service the high-traffic regions of the CBD, Bugis and Chinatown. Internationally, a series of acquisitions and strategic moves will allow CD to continue enjoying stable revenue and operating profit contributions.

Fair value raised to S$1.90

Rolling our valuations forward to include FY14, we raise our revenue growth projections to 8% from 4% previously. In addition, we lower our operating expenses estimates i.e. fuel and electricity costs correspondingly. Maintaining our 50% of PATMI dividend payout forecasts, our DDM-based valuation increases to S$1.90. Upgrade to BUY.