Earnings hurt by high diesel costs, but forward earnings to grow as diesel costs fall

ComfortDelgro reported 2008 net profit of S$200.1m, down 10.3% YoY. This is in line with our S$198.3m expectation and consensus’ S$195m.

Turnover rose S$104.3m or 3.5%. Excluding the negative FX translation, turnover would have risen S$244.3m or 8.2%. This was driven by Australian business’ turnover surging 19.6% in AUD terms, and China business’ turnover rising 8.3% in RMB terms. The mild 0.9% rise in UK turnover (in GBP terms) was due to expansion in bus offsetted by taxi turnover reduction due to lower corporate bookings.

Lower fuel costs to drive 2009 and 2010 earnings. WTI price was fallen from 2008 average of US$100/bbl to the current US$36/bbl. Although ComfortDelgro has hedged 43% of its 2009 diesel requirements (at higher-than-current WTI prices), there will be cost savings from the balance 57% that is unhedged. We are assuming effective 2009 WTI price of US$63/bbl for ComfortDelgro, which will lower its 2009 energy costs by 30% from 2008 levels. We expect 2010 earnings to rise further on our assumption of 2010 WTI price of US$45/bbl.

Lower payout ratio to disappoint investors. ComfortDelgro declared a final dividend of 2.4S¢/share, giving a FY08 payout ratio of 52%. This is sharply lower than FY07’s 85% (which includes special dividend). The market is likely to be disappointed with this. Looking ahead, management said that they will payout more than 50% of its earnings.

We raise target price from S$1.63 to S$1.78, on the back of a lower market risk premium for our SBST DCF valuation. The other components of our sumof- the-parts valuation are obtained from PE valuation. Pending imminent announcement on fare cuts, investor interest may be more muted. But we b elieve investor interest will emerge thereafter.

FY08 showing ridership growth and impact of oil

FY08 results above consensus and in line with our expectations
The company delivered a commendable set of results, with earnings declining by 10.3% YoY to S$200.1m on a 31.8% YoY increase in energy costs as the oil price hit a peak in 2008. We expect CD’s earnings to rebound in 2009 as the company could benefit from resilient ridership and moderating costs due to lower oil prices. We reiterate Buy on the stock and our TP of S$1.75.

Cut in dividend payout ratio to conserve cash for future acquisitions
CD has cut its DPR from 85% to 52% for FY08 as management wants to conserve its cash to seek opportunities for growth overseas. The company has a strong balance sheet with a strong FCF and is conserving its cash to have the flexibility for acquisitions. The company has a track record of acquisitions (it has acquired S$1.0bn in overseas assets) and has generated decent earnings from its offshore acquisitions. Listed transport companies in the UK are trading at single-digit multiples and as such could present attractive acquisition targets.

Watch out for a potential reduction in fares at the end of Feb09
We believe the government’s past actions in reducing fares in 1999 during the Asian Financial Crisis are indicative of actions they will likely take during the current recession. We have already factored in a potential cut in train and bus fares (through the introduction of a 5% rebate in FY09E) into our model. We would be buyers on weakness given the PTC’s potential fare reduction at the end of Feb09.

TP of S$1.75 implies 15.2x FY09E
Our DCF-derived TP is based on a COE of 8.0% and a TGR rate of 1.0%. Downside risks include: 1) increase in oil prices; 2) exposure to foreign exchange volatility; and 3) regulatory risks in both domestic and overseas ventures.

Meeting challenges head-on

• Slightly above expectations. 4Q08 net profit of S$44.8m (-6.3% yoy) was marginally above our estimate but ahead of consensus. FY08 net profit of S$200m was 2.3% and 6.4% higher than our forecast and consensus respectively. This was mainly due to lower-than-expected operating expenses in 4Q08. FY08 pretax margins slipped to 9.7% from 11.2% in FY07, but were steady yoy at 9.6% in 4Q08. Revenue fell 1.7% yoy to S$760m, led by forex translation of A$ and ₤. Overseas operations contributed 43% of revenue in FY08. A final tax-exempt dividend of S$0.024 was declared.

• Operational review. Bus revenue dipped 0.3% yoy to S$1,533m in FY08, due to the translation impact of a weak A$ and ₤ against S$. However, strong growth came from rail (+22.1% yoy), diesel sales (+31.9% yoy), automotive engineering (+40.3%) and vehicle inspection (+16.5%). Excluding the negative forex translation impact of S$140m, revenue would have risen S$244m (+8.2% yoy). A positive translation of S$133m from operating expenses mitigated this. The net forex translation impact for the group was a manageable loss of S$7.1m.

• Outlook. We expect CD to maintain its performance, supported by bus and rail ridership growth in its key markets; bus and taxi operations; the bus station business in China; and steady vehicle inspection and automotive engineering businesses in Singapore. The UK taxi business is expected to weaken while diesel sales should decline on lower selling prices. Management remains cautious in view of potential further weakness of the A$ and ₤, and will further tighten cost and credit controls.

• Forecasts adjusted; maintain Outperform. We adjust our FY09-10 forecasts by +4.2% to -5.5% to reflect retreating energy prices, higher ridership and forex translation. We also introduce FY11 forecasts. Due to our earnings changes, our DCF-derived target price falls to S$1.84 from S$1.97 on an unchanged WACC of 11%. Management guided for a minimum 50% dividend payout and no special dividends for FY09, translating to a prospective CY09 dividend yield of 4.4%. Maintain Outperform on the back of its defensive earnings.

Positioning for the long term

4Q/FY08 net profit were within expectations. But, a lower dividend payout at 52% versus past 4 years was a surprise. It seems like management is conserving cash for acquisitions, which should be beneficial over the long term, given its track record. Maintain Buy, TP: S$1.57.

4Q/FY08 results in line. Headline net profit of S$200m (- 10% y-o-y) were within our expectations. Revenue grew 4% to S$3.1bn but operating profit dipped 17% to S$278m largely on higher fuel costs (+33% y-o-y, S$69m), material and consumables (+33%, S$82m) taxi drivers’ benefits (+16% y-o-y, S$10m) but mitigated slightly by lower staff and vehicle leasing costs.

Final dividend of 2.4cents below expectations. The Group declared a final dividend of 2.4cents, equating to a 52% payout, which was below our expectations of 70% and the range in the last 4 years (75% – 85%). We think management is conserving cash for overseas acquisition opportunities, particularly in Australia and China. Singapore 2009 Budget yields S$35m savings. The recent Budget measures will yield S$35m for the Group and will be passed on as rebates and the widely anticipated fare reductions later this year. We do not expect the fare reduction to have a significant impact on the Group’s bottomline.

Maintain Buy; TP: S$1.57. Whilst the market may be disappointed by a lower dividend payout versus its historical average, we think this may be beneficial for the Group in the long-term if they are able to deliver on accretive acquisitions to reinforce its overseas growth. We maintain
our Buy recommendation with a TP: S$1.57 based on 15x FY09F earnings.