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• 1Q10 net profit at S$54.3m (+3% yoy) within expectations

• Muted quarters ahead with flat to lower yoy growth on weaker GBP

• Negatives from GBP priced in, but no re-rating catalyst in sight

• FY10/11F lowered by 5%/10%; Downgrade to Hold, TP: S$1.64.

1Q10 +3% yoy within expectations; expect muted quarters ahead. 1Q10 net profit at S$54.3m (+3% yoy) was within our expectations, forming c.25% of our full year estimates. But, we expect lackluster earnings in quarters ahead, possibly with a downward trend on impact of a weaker GBP against SGD (translation impact). We have lowered our exchange rate assumption for GBP/SGD to S$2/GBP in FY10F/11F, from 2.15 previously, in view of the significantly weaker GBP.

… weaker GBP has been priced in for now. ComfortDelgro’s share price has depreciated by c.6% in the past 2 weeks on the weaker GBP. We believe the impact from a weaker GBP is priced in. We estimate for every 10% depreciation of GBP vs SGD, Group operating profits will decline by c.1%.

Cut forecasts by 5%/10% in FY10F/FY11F, downgrade to Hold, no significant catalyst. We lower FY10F/11F by 4.5% in FY10F and 9.7% in FY11F. Our PE/DCF derived TP is cut to S$1.64, and we downgrade our recommendation to Hold, from Buy. We believe much of the negatives (weak GBP) have been priced in. But, we also do not expect any significant rerating on the counter in the near term given the mixed growth from its geographically diverse operations. Upside/downside risks to our call are significantly movements in SGD against foreign currencies, weaker/stronger oil price, potential award of Downtown Line MRT contract in Singapore, and acquisitions.

Strong set of results

• 1Q10 revenue came in at S$766.9m (+7% y-y) while net profit was up 3.4% y-y to S$54.3m, both were slightly ahead of our expectations

• Australian bus business continues to contribute strongly and there were improvement in the Singapore and UK taxi businesses

• Upgrading our revenue and net profit estimates by 2% and 6.8% to reflect the strong growth by the Australia business and the recovery of the UK business

• Upgrade to BUY from Hold with a target price of S$1.73 1Q10 results were slightly better than our estimates

Revenue was up 7% y-y to S$766.9m due to broad-based growth across the various business segments, representing about 24.7% of our FY10 estimates. Operating profit was up 11.2% y-y to S$90.6m due to the increase in revenue and positive FX translation effect while operating margin also improves slightly to 11.8% from 11.4%. Net profit came in at S$54.3m (+3.4% y-y), representing about 30% of our FY10E estimates.

Upgrading our revenue and net profit estimates for FY10

We are upgrading our revenue and net profit estimates for FY10 by 2% and 6.8% to S$3.17b and S$193.5m respectively to reflect the better performance from most of the business segments especially the Australia business. Operating costs remain fairly stable especially fuel costs, crude oil has fallen from US$85 to US$76 due to the ongoing debt crisis in Europe. Management updated us that they will continue to hedge their crude oil requirements to manage their operating costs effectively.

Outlook for the rest of the year

The recovery of the Singapore economy coupled with the opening of integrated resorts will contribute strongly to the growth of their Singapore taxi business for 2010. We see the Australia bus business continue to grow strongly in 2010 and we are forecasting revenues to increase 10% y-y to S$304m. Rail riderships in Singapore will likely see double-digits growth for the year as the increased connectivity and introduction of distance-based fares will encourage more commuters to switch to the rail network. However we see the Singapore bus business continue to suffer with the progressive opening of circle line and we see average fares for buses falling further as commuters will rely more on the rail network and hence shorter journeys on the bus.

Valuation and Recommendation

We are upgrading our price target for CDG to S$1.73 from S$1.68 to reflect the better outlook for the UK business and improvement in the Singapore taxi business. CDG has fallen 5.7% to S$1.49 since our downgrade on 11th February, we feel that the current price of S$1.49 represent a very good opportunity for investors who wish to have exposure to land transportation sector. Our DCF model is based on a RFR of 2.7%, 10.5% market return and 1% terminal growth.

Operating profit +11%

• Overall a good set of results for ComfortDelGro (CD) for 1QFY10. While net profit was up a modest 3% YoY to $54mil, this was largely due to deferred tax write-back of S$5.2mil in 1QFY09. At operating profit level, CD grew 11% YoY to S$91mil, which is within expectations.

• With operations in Britain accounting for 10% of operating profit, China 12% and Australia 15%, CD benefited from a S$2mil forex translation effect. This was led by 26% YoY appreciation in A$ which offset 8% YoY fall in the Chinese yuan, while the pound sterling was relatively stable, against the S$.

• Operations in Australia was best performing, with revenue growth of 84% and operating profit growth of 90%. Apart from the full consolidation of bus operations in Melbourne (acquired in February 2009), Sydney bus operations enjoyed increased services.

• China operations were moderately healthy in local currency terms, with revenue growth across bus, taxi and all other segments. However, higher costs and continued losses at Shenyang bus business (S$2.6mil) brought 6% YoY fall in operating profit to S$10.5mil. Britain fared poorly, as bus services saw lower contracts and higher ramp up costs for new services in Ireland. Operating profit in Britain fell 17% YoY to S$9mil.

• Singapore made up 57% of revenue (+2% YoY to S$440mil) and 63% of operating profit (+10% YoY to S$57mil). Better perfomances in Rail and Taxi segments offset poor bus operations.

• Seventy-five percent-owned SBS Transit saw a mere 1% YoY growth in ridership to 207 million in 1Q10 while April 2009's adjustment cut average fare by 5% YoY. Rail ridership on the other hand, grew 12% to 36 million, while taxi revenue grew 8% YoY on higher operating fleet.

• Total expenses which grew 6.5% YoY, lagged revenue growth of 7%, marginally improving operating margins to 11.8%. The biggest component – staff costs – rose 10% YoY due to higher headcount particularly for bus operations, and made up 36% of expenses.

• Despite higher oil-prices at 80% higher in 1Q10 compared to 1Q09, CD's oil-related cost items were well-contained as Management had a good hedged position.

• We fine tune our segmental and costs allocations, as bus operations in Singapore and Britain were lower than expected while Australia bus and other segments were better than expected. We also adjust our Sterling/S$ forecast assumption down by 8% to 2.1.

• On balance, the tweak on EPS is insignificant – we maintain growth at 4% p.a. over the forecast period.

• PE stands at 14x FY10F and 13x FY11F. We maintain BUY rating with 26% upside to fair value of S$1.89.