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.

• Comfort Delgro reported 1Q ’13 net profit of S$57.7 million, up 7.9% y-o-y, which was above market expectations.
  
• The Group’s taxi business contributed positively to its bottom-line especially in Singapore, due to higher rentals from replacement taxis, a larger operating fleet and an increase in cashless transactions.
  
• But its bus and rail business in Singapore saw growth in revenue being offset by higher wages.
  
• The weakness in Australian dollar, Sterling pound and Chinese Renminbi relative to the Singapore dollar also negated revenue performance from its overseas operations.
  
• Even as net capex for 1Q ’13 rose to S$101.4 million, versus S$86.9 million in the same period last year, its balance sheet remains healthy given its net cash position.
  
• Looking ahead, management guided for higher revenue contributions from its overall bus business (except for UK market), as well as increase in top-line for its Singapore rail and bus units. But they also citied that they could face rising cost pressures going forward.
  
• Overall, the transportation company posted a decent set of quarterly earnings results, despite the headwinds from escalating salary costs and translation (forex) loss from its overseas business amid a strong Singapore dollar.

• Comfort Delgro reported 1Q ’13 net profit of S$57.7 million, up 7.9% y-o-y, which was above market expectations.
  
• The Group’s taxi business contributed positively to its bottom-line especially in Singapore, due to higher rentals from replacement taxis, a larger operating fleet and an increase in cashless transactions.
  
• But its bus and rail business in Singapore saw growth in revenue being offset by higher wages.
  
• The weakness in Australian dollar, Sterling pound and Chinese Renminbi relative to the Singapore dollar also negated revenue performance from its overseas operations.
  
• Even as net capex for 1Q ’13 rose to S$101.4 million, versus S$86.9 million in the same period last year, its balance sheet remains healthy given its net cash position.
  
• Looking ahead, management guided for higher revenue contributions from its overall bus business (except for UK market), as well as increase in top-line for its Singapore rail and bus units. But they also citied that they could face rising cost pressures going forward.
  
• Overall, the transportation company posted a decent set of quarterly earnings results, despite the headwinds from escalating salary costs and translation (forex) loss from its overseas business amid a strong Singapore dollar.

Positive On London Bus Acquisition

ComfortDelGro (CD) announced that it is acquiring part of FirstGroup’s London bus business for GBP57.5m (SGD109m). The purchase price implies an EV/EBITDA of 5.2x while CD currently trades at 6.1x FY13 EV/EBITDA. We are positive on the acquisition, and raise FY13/14 earnings by 2.9%/5.5%. Maintain BUY with higher TP of SGD2.20 (from SGD2.10 previously) based on DCF (WACC:9.0%; TGR: 2.5%).

Acquisition offers good value. We think the acquisition is value accretive to CD given that the purchase was made at 5.2x EV/EBITDA, cheaper than CD’s FY13 EV/EBITDA of 6.1x. Though CD’s UK/Ireland bus business is commanding lower operating margins of 7.8% compared to its Australia bus business’ 19%, management notes that this acquisition was opportunistic given improving bus operations in the UK.

A larger share of UK bus pie. Following this acquisition, CD’s UK bus market share would increase by 7ppt to 19%, sharing a joint second position with Arriva. Go-Ahead currently leads the UK bus market with a 24% market share.

Development of overseas business the way forward. As the domestic land transport market for rail and bus operators in Singapore remain challenging, we favour the growth potential of CD’s overseas businesses which accounts for 46% of operating profit and commands higher operating margins of 13.2% (versus 10% for Singapore). Management is targeting for overseas profit contribution to hit the 50% level. This London bus acquisition follows the Australia bus acquisition of Deanes Transit Group announced in early Aug 2012.

CD still offers value at current price level. At FY13 P/E of 15.5x, CD remains more attractive than SMRT’s 22.0x 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.

Another record year

• 4Q within expectations; FY12 a record year
  
• Final DPS of 3.5 Scts, equating to payout of 54% for FY12
  
• Balance sheet remains strong to pursue inorganic growth
  
• Trading at lower valuations compared with SMRT despite geographical exposure, stable growth. BUY, TP: S$2.05
  

Highlights

4Q within expectations. 4Q12 net profit increased by 2% y-o-y to S$57.6m, ending FY12 at a record profit of S$248.9m (+6% y-o-y), within our forecasts (S$248m). 4Q revenue rose by 2%, driven by all business segments, except bus station and automotive engineering in China. EBIT margins dipped marginally to 10.6% (4Q11: 10.8%) as operating expenses rose by 2% mainly from higher staff costs (+6% to S$284.3m) and contract services (+12% to S$121.4m), offset partially by lower materials and consumables (-11% to S$79.8m) and fuel and electricity costs (-13% to S$64.3m).

Hedging energy/fuel as in 2012. Management indicated that they have hedged 60% and 40% of its fuel requirements in Singapore and the UK, respectively. This should continue to provide visibility and stability to its earnings in 2013, as in 2012.

DTL incurred a loss of S$6.1m. Staff recruitment is expected to continue towards the operation of Downtown MRT Stage 1 (DTL1) in 2013 with about 400 staff, up from 210 currently. While we expect losses to continue as operations ramp up, this should not pose a huge impact to the group given its larger size and geographical/ business diversification, in our view.

Our View

Dividend per share of 3.5 Scts. Final dividend of 3.5 Scts was proposed (FY12: 3.3 Scts). Coupled with the interim dividend of 2.9 Scts, this equates to a total payout of 6.4 Scts (54% payout ratio). Capex requirements are projected to taper off in FY14F, and we remain hopeful that dividend payout could increase.

Preferred land transport play, strong balance sheet. CD remains as our preferred land transport play given its stable growth profile, geographical diversification and strong balance sheet to pursue inorganic growth. Net debt to equity stands at 0.3%, down from 2.2% in FY11.

Recommendation

Maintain BUY, TP at S$2.05. Our TP is based on DCF (WACC: 10%, t=1%) and 15x average FY13F/14F PE. This implies 16.3x /15.8x PE on FY13F/14F, slightly above its historical average of 15x, but significantly below SMRT’s 22x FYE Mar14F PE.