Off to a good start

• 1Q14 PATMI +9.7% YoY
  
• Stable margins
  
• Policy change a key catalyst
  

1Q14 results within expectations

ComfortDelGro (CDG) started FY14 on a bright note, registering a 9.2% YoY increase in its 1Q14 revenue to S$950.8m, while PATMI rose 9.7% to S$63.3m. This was within ours and the street’s expectations, with topline and bottomline forming 24.0% and 22.5% of our full-year forecasts, respectively. Broad-based revenue growth was achieved across most operating segments, with the exception of its Automotive Engineering Services and Car Rental & Leasing divisions. Despite cost pressures from higher staff expenses (+13.0% YoY) and fuel and electricity costs (+21.7% YoY), coupled with a net negative FX impact of S$0.5m on its profit before tax, CDG managed to keep its margins stable. Operating and net margin for 1Q14 came in at 10.7% and 6.7%, as compared to 11.0% and 6.6% in 1Q13, respectively.

Local conditions remain challenging

CDG’s Singapore operations remain challenging as expected, with its core Bus and Rail businesses running into operating losses of S$4.7m and S$1.0m (excluding rental and advertising income), respectively. The latter was impacted by start-up losses amounting to S$6.8m at DTL1. Average daily ridership has increased from 54k in 1Q14 to ~57k in Apr-May, but still short of LTA’s steady state ridership target of 75k. On the contrary, CDG’s overseas operations continued its robust growth, conjuring up a 13.2% and 10.0% YoY growth in revenue and operating profit to S$376.5m and S$51.6m, respectively.

Maintain BUY

Besides CDG’s Australia bus business which is expected to register a decline in revenue, management guided that its remaining business segments are expected to either maintain or increase their revenue ahead. Management also refused to divulge details on probable upcoming policy changes by the Singapore government, but hinted that more

details on the new bus operating model framework may be announced during the next Parliamentary session to be held on 16 May. Any measures which would enhance the sustainability of the transport sector would be a major catalyst to both CDG and SMRT. We retain our forecasts, BUY rating and fair value estimate of S$2.30 on CDG.

Yet another solid quarter

• 1Q14 net income up 9.7% YoY to SGD63.3m, in line with expectations.
  
• Broad-based revenue growth heartening; 1Q14 loss of SGD6.8m on track to meet our full-year forecast for SGD25m.
  
• DTL ridership still encouraging. Reiterate BUY with unchanged TP of SGD2.40.
  

What’s New

ComfortDelGro (CDG) reported yet another set of solid results for 1Q14, with net income up 9.7% YoY to SGD63.3m, in line with our expectations. Revenue improved across all major segments of its business except for a marginal decline in the car rental and leasing operations. The group also benefitted from the impact of foreign currency translation, with the British pound and Chinese yuan strengthening by around 9.5% and 4.5% respectively over the same period last year. Management was unfazed by the growing presence of third-party taxi booking apps, citing an increase in bookings through its system during the quarter. Downtown Line (DTL) losses for 1Q14 hit about SGD6.8m, tracking our full-year forecast for SGD25m. Average daily ridership for the line was also encouraging at 57,000 in April (1Q14: 54,000) against the target of 75,000.

What’s Our View

CDG’s strong 1Q14 results reaffirm our choice of the stock as the preferred exposure to Singapore’s Land Transport sector. Three factors are in favour of CDG. First, its large taxi fleet in Singapore enables it to consistently report industry-high earnings. Second, its diversified geographical and business exposure offers investors stable and sustainable investment returns. Third, the full opening of the DTL over the next three years will see SBS Transit gain rail market share and become a major operator. We believe the impending announcement by the regulators on transition details for its rail and bus business model in Singapore is a key event to watch. Reiterate BUY and TP of SGD2.40, based on 18x FY14E P/E.

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.