Aussie Bus Buy Value Accretive

ComfortDelGro (CD) announced that it is buying Driver Group’s Melbourne bus business for AUD22m (SGD27m). The acquisition’s estimated EV/EBITDA is 5.8x while CD is currently trading at 6.5x FY13 EV/EBITDA. As we are positive on the acquisition, we raise our FY13/14 earnings forecasts by 0.6%/1.1%. Maintain BUY, with a higher SGD2.25 TP (vs SGD2.20 previously), based on DCF (WACC: 9.0%; TGR: 2.5%).

A value accretive acquisition. We think the acquisition offers good value to CD as the purchase was done at 5.8x EV/EBITDA, lower than CD’s FY13 EV/EBITDA of 6.5x. We note that CD’s Australian bus segment commands lucrative EBIT margins of 19% – the highest amongst its bus segments. The EBIT margin for this acquisition is estimated at 22%. CD’s Australia bus unit is also its biggest contributor to bus profits, making up 22% of group operating profit.

Only buying the metropolitan bus routes and fleet. The Driver Group is a family-owned company based in Melbourne. It operates metropolitan bus routes in Melbourne’s eastern suburbs, as well as operates school services, tourist shuttles and charter services. However, CD is only buying the group’s five metropolitan bus routes and its fleet of 42 vehicles. CD is expected to gain some synergy from operating from its existing depots in Oakleigh.

Still positive on group’s overseas businesses. As the rail and bus operators in Singapore continue to face challenges, we are positive on the growth potential of CD’s overseas businesses, which make up 46% of operating profit and fetch higher operating margins of 13.2% (versus 10% for Singapore). Management is targeting for its overseas profit contributions to hit the 50% level.

Stock still offers value. At a FY13 P/E of 16.8x, CD is still more attractive than SMRT’s 25.0x FY14 P/E (FYE Mar). We like CD’s strong overseas network, which enhances its overseas growth prospects. We view this as a distinct advantage given the challenges facing the domestic land transport market.

Steady As She Goes

ComfortDelGro (CD) reported strong 1Q13 PATMI that grew 8% y-o-y to SGD58m. 1Q13 earnings accounted for 22.1% of our full year estimates, which were in-line with our expectations. We maintain our BUY rating and TP of SGD2.20 based on DCF (WACC: 9.0%; TGR: 2.5%). CD remains our pick within the land transport space for its 46% overseas operating profit exposure and more attractive valuations.

Another strong quarter of broad based growth. CD’s 1Q13 EBIT grew 3% to SGD96m due to growth across the board, which was partially offset by weakness from Singapore and UK bus, as well as Singapore rail operations. Singapore bus remained subdued with higher staff, repair and maintenance and depreciation costs, while Singapore rail was weak due to higher staff costs largely from the DTL start up. UK bus EBIT fell 17% y-o-y to SGD9.2m due to a declining GBP and lower Metroline revenue from a difference in billing cycle timing.

Ridership growth appears to be moderating. Bus average daily ridership grew 2.3% in 1Q13 while rail average daily ridership rose 6.4% for the same period. This compares to the 4.2-7.6% run rate for bus and 9-16.8% run rate for rail, for the same periods in the last two years. Though it may be too early to classify this as a trend, slower ridership growth is a negative for land transport operators. However, we are not overly concerned for CD given its large overseas exposure and its intention to target for overseas profit contribution to hit the 50% level (from current c.45%).

Share price has run up but stock still offers value. At FY13 P/E of 16.6x, CD remains more attractive than SMRT’s 25.0x FY14 P/E (FYE Mar). We like CD for its widespread overseas network which allows it better overseas growth prospects – something we view as a strong advantage given the challenging domestic land transport market.

Decent start to the year

• Group did well in 1Q13
  
• Fuel savings for FY13
  
• Still hopeful for fare increase
  

1Q13 results show YoY improvement

ComfortDelGro’s 1Q13 results saw revenue increasing slightly by 1.8% YoY to S$870.8m on the back of broad–based growth across its segments while operating profit improved 2.8% to S$95.9m as higher staff (+5.1% to S$276.5m) and repairs and maintenance expenses (+1.7% to S$42.9m) were offset by a reduction in fuel and electricity expenditure (-9.7% to S$64.9m). As a result, PATMI rose 7.9% to S$57.7m.

Group to benefit from lower fuel costs

The group has benefited from proactive fuel hedges put in place during the lull in fuel prices, and this has helped to mitigate cost pressures in other areas (i.e. increase in hiring related to the Downtown Line) as well as take the sting out of sustained weakness in its SG core bus operations, which saw a wider operating loss of S$5.4m (1Q12: -S$3.7m). With 60-70% of its diesel and 70% of its electricity requirements hedged for FY13, we expect this trend to continue in the coming quarters.

No word on possible fare increase but other catalysts remain

We had previously expected the fare review committee to announce a fare increase by the middle of 2Q13. With that time-frame now unrealistic, we temper our projections for ComfortDelgro’s Singapore operations for the remainder of FY13 but still expect to see an implementation this year. Nonetheless, the group’s other segments (i.e. Viacom, taxi etc) and overseas ventures remain attractive. For instance, it is in the tendering process for additional bus routes in NSW, Australia, and if successful, will benefit the group beyond FY13.

Decent start to the year

• Group did well in 1Q13
  
• Fuel savings for FY13
  
• Still hopeful for fare increase
  

1Q13 results show YoY improvement

ComfortDelGro’s 1Q13 results saw revenue increasing slightly by 1.8% YoY to S$870.8m on the back of broad–based growth across its segments while operating profit improved 2.8% to S$95.9m as higher staff (+5.1% to S$276.5m) and repairs and maintenance expenses (+1.7% to S$42.9m) were offset by a reduction in fuel and electricity expenditure (-9.7% to S$64.9m). As a result, PATMI rose 7.9% to S$57.7m.

Group to benefit from lower fuel costs

The group has benefited from proactive fuel hedges put in place during the lull in fuel prices, and this has helped to mitigate cost pressures in other areas (i.e. increase in hiring related to the Downtown Line) as well as take the sting out of sustained weakness in its SG core bus operations, which saw a wider operating loss of S$5.4m (1Q12: -S$3.7m). With 60-70% of its diesel and 70% of its electricity requirements hedged for FY13, we expect this trend to continue in the coming quarters.

No word on possible fare increase but other catalysts remain

We had previously expected the fare review committee to announce a fare increase by the middle of 2Q13. With that time-frame now unrealistic, we temper our projections for ComfortDelgro’s Singapore operations for the remainder of FY13 but still expect to see an implementation this year. Nonetheless, the group’s other segments (i.e. Viacom, taxi etc) and overseas ventures remain attractive. For instance, it is in the tendering process for additional bus routes in NSW, Australia, and if successful, will benefit the group beyond FY13.

Defensive earnings

In contrast to its peer SMRT’s profit deterioration, ComfortDelGro turned in solid 1Q numbers characterised by mild revenue growth and stable margins. Management’s reaffirmation of its 50% dividend payout ratio was music to our ears in light of SMRT’s dividend cuts.

1Q13 net profit met expectations at 23% of our FY13 forecast and 22% of consensus. We keep our Neutral rating, EPS forecasts and target price (DCF, 7.3% WACC) unchanged. The stock lacks rerating catalysts, but is supported by a 3% dividend yield.

Lower energy costs offset cost inflation elsewhere

ComfortDelGro benefitted from lower energy costs in 1Q13, a trend which we expect to persist throughout the rest of the year. 1Q13 revenue inched up by 2% on broad-based growth. Lower energy costs (-13% yoy) helped to offset higher staff costs (+5.1%) and contract services expenses (+8.0%), supporting an 8% growth in net profit. The group has hedged 60-70% of its diesel needs and 70% of electricity needs for 2013 at unit costs below that of last year, providing some relief from escalating operating cost inflation.

DTL start-up costs weigh on rail margins

The group’s EBIT margin was stable at 11.0% in 1Q13 vs. 10.9% in 1Q12. The rail segment’s EBIT margin declined by 2.9%pts to 7.5% due to start-up costs incurred for the Downtown Line, but this was offset by stronger margins from diesel sales.

Dividends intact

In contrast to its peer SMRT’s dividend cuts, CD remains committed to its 50% payout policy. The group is free-cash flow positive and does not expect significant increases in capex this year. At 3.0%, CD’s dividend yield is superior to that of SMRT’s 1.7% yield.