Category: ComfortDelgro
ComfortDelgro – OCBC
COMFORTING RESULTS BUT RICH VALUATIONS
- FY12 within expectations
- Domestic fortunes turning
- But upside already mostly priced in
FY12 closes on a positive note
ComfortDelGro’s (CD) FY12 results came in within our expectations with revenue increasing 3.9% YoY to S$3.5b while operating profit improved 3.3% YoY to S$412.3m as the group managed to keep a lid on operating expenses during the period. With PATMI rising 5.6% YoY to S$248.9m, management declared a final dividend of 3.5 S cents (FY11: 3.3 S cents), taking the total dividend declared for the year to 6.4 S cents (FY11: 6.0 S cents). As a percentage of PATMI, the payout ratio rose marginally by 0.7ppt to 54%.
Look forward to fare increases
A long overdue fare increase will likely materialise by the middle of 2Q13, and this will help to alleviate pressures on operating margins for CD’s domestic segments. Coupled with the continued growth in bus and rail ridership – albeit at a slower pace – we expect the two segments to post more encouraging results in the coming quarters.
Has time to adapt to changes in overseas landscape
The loss of the two Australian bus routes will only take effect in Sep 2013 so the impact to CD will be more significant from FY14. In the absence of tender dates for its two remaining services, management has some lead time to adjust its approach although it has signalled its willingness to accept lower margins. That said, the relatively new tender process also opens up opportunities for the group to expand its footprint into other regions.
Allocation to defensive sectors has benefited CD
YTD, CD’s share price has appreciated by ~7%, benefiting largely from a combination of improving prospects and a greater emphasis on defensive qualities. Although our fair value increases to S$1.95 (from S$1.90) after we adjust our PATMI payout ratio to 52% (from 50%), much of the upside has already been priced in. Downgrade to HOLD on valuation grounds.
Land Transport – DMG
Slower ridership growth for operators
Slower ridership growth a dampener for operators. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. We believe slower ridership growth is partially attributable to slower population growth (Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%). We also think population growth could remain soft given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. As operators continue to face cost pressures, we maintain our NEUTRAL call on the sector, with preference for ComfortDelGro (CD) (S$1.72 BUY TP S$1.85) for its cheaper valuations and overseas growth potential over SMRT (S$1.69 NEUTRAL TP S$1.60).
Jan – Oct 12 ridership for rail and bus growing, albeit at a more moderate pace. Ridership for rail and bus continues to grow, due to population growth, as well as high car purchasing costs. However we believe growth is moderating. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. The slower pace in ridership growth coupled with an environment of higher repair and maintenance and staff costs will likely weigh on operators’ margins.
Population growth slowing down. Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%. The Ministry of Transport (MOT) has capped Singapore’s annual vehicle growth rate at 0.5% pa from Feb 13 to Jan 15, and COE (Cat A) prices has spiked 50% YoY to S$78,523 in Dec 12. While we expect more commuters to switch to rail and bus transportation due to the higher car ownership cost, this may not be able to compensate against expected softer population growth given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. We think catalysts for the operators could come from a fare revision formula expected in 1H13.
ComfortDelGro remains our preferred pick due to cheaper valuations and overseas potential. We remain NEUTRAL on Singapore’s land transport sector due to slower ridership outlook stemming from slower population growth as well as cost pressures that could cling in the near term. We favour CD over SMRT due to the former’s cheaper valuation and greater overseas exposure. CD’s overseas operations accounts for 46% of its EBIT. CD’s average overseas EBIT margin of 12.7% is also higher than the 10.4% for its Singapore operations. CD is currently trading at a more attractive 14.5x FY13 P/E vs SMRT’s 19.0x FY13 P/E (FYE Mar).
ComfortDelgro – OCBC
A BETTER YEAR IN 2013
- Operating environment turning favourable
- Growth prospects in the pipeline
- Deserves upgrade to BUY
CD deserves rating upgrade
Recent comments by the Transport Minister have compelled us to revisit our conservative growth assumptions for ComfortDelgro (CD). As a result, we increase our fair value from S$1.60 to S$1.90, which raises our rating to a BUY from HOLD previously.
Local pressures to dissipate
Previously, our main issue against raising our valuation for CD was the weakness in SG bus operations especially with declining average fares and rising operating expenses i.e. wages. However, the onset of the Bus Services Enhancement Programme (BSEP) and its associated subsidies – and the increased likelihood of a fare revision in 2013 – point to a gradual turnaround for this segment in FY13.
Favourable fuel outlook
Despite geopolitical tensions in the Middle East, a lack of supply concerns has kept fuel prices subdued at current levels, and this trend is likely to extend into 2013. With substantial hedges in place – 40% of its diesel requirements for Singapore and the UK as well as 60% of its electricity needs – CD is well-positioned to benefit further from any additional dips and its profitability should remain supported.
Greater growth potential locally & abroad
Beyond FY13, CD has better prospects in its pipeline that will aid growth down the line. For instance, stage-one of the Downtown Line (DTL) will be operational in FY14. Although it will encompass only six stations, it will service the high-traffic regions of the CBD, Bugis and Chinatown. Internationally, a series of acquisitions and strategic moves will allow CD to continue enjoying stable revenue and operating profit contributions.
Fair value raised to S$1.90
Rolling our valuations forward to include FY14, we raise our revenue growth projections to 8% from 4% previously. In addition, we lower our operating expenses estimates i.e. fuel and electricity costs correspondingly. Maintaining our 50% of PATMI dividend payout forecasts, our DDM-based valuation increases to S$1.90. Upgrade to BUY.
ComfortDelgro – OCBC
A BETTER YEAR IN 2013
- Operating environment turning favourable
- Growth prospects in the pipeline
- Deserves upgrade to BUY
CD deserves rating upgrade
Recent comments by the Transport Minister have compelled us to revisit our conservative growth assumptions for ComfortDelgro (CD). As a result, we increase our fair value from S$1.60 to S$1.90, which raises our rating to a BUY from HOLD previously.
Local pressures to dissipate
Previously, our main issue against raising our valuation for CD was the weakness in SG bus operations especially with declining average fares and rising operating expenses i.e. wages. However, the onset of the Bus Services Enhancement Programme (BSEP) and its associated subsidies – and the increased likelihood of a fare revision in 2013 – point to a gradual turnaround for this segment in FY13.
Favourable fuel outlook
Despite geopolitical tensions in the Middle East, a lack of supply concerns has kept fuel prices subdued at current levels, and this trend is likely to extend into 2013. With substantial hedges in place – 40% of its diesel requirements for Singapore and the UK as well as 60% of its electricity needs – CD is well-positioned to benefit further from any additional dips and its profitability should remain supported.
Greater growth potential locally & abroad
Beyond FY13, CD has better prospects in its pipeline that will aid growth down the line. For instance, stage-one of the Downtown Line (DTL) will be operational in FY14. Although it will encompass only six stations, it will service the high-traffic regions of the CBD, Bugis and Chinatown. Internationally, a series of acquisitions and strategic moves will allow CD to continue enjoying stable revenue and operating profit contributions.
Fair value raised to S$1.90
Rolling our valuations forward to include FY14, we raise our revenue growth projections to 8% from 4% previously. In addition, we lower our operating expenses estimates i.e. fuel and electricity costs correspondingly. Maintaining our 50% of PATMI dividend payout forecasts, our DDM-based valuation increases to S$1.90. Upgrade to BUY.
Land Transport – DMG
New Taxi availability standards
We expect minimal impact to operators. LTA has announced new taxi availability standards to be implemented from 1 Jan 13. This will involve having taxi availability during peak periods (For 2013: 65% of taxis on the road from 6am-7am, 11pm-12am, and 70% from 7am-11am, 5pm-11pm), as well as general availability throughout the day (70% of taxis with minimum daily mileage of 250km). Any financial penalty implemented could begin from Jun 13 onwards. We believe the impact on operators will be minimal: (1) ComfortDelGro (CD) has high chance to have already met criteria with currently 80% of its fleet running on two shifts with average daily taxi mileage of 400km, while (2) SMRT’s fleet, of which less than 50% is running on two shifts could benefit from LTA’s measures to complement taxi availability. Maintain BUY on CD with TP of S$1.85 and NEUTRAL on SMRT with TP of S$1.60. We prefer CD on the back of overseas expansion potential and cheaper valuations with CD trading at 13x FY13 P/E compared SMRT trading at 19x FY13 (FYE Mar) P/E.
CD likely to have already met new Taxi availability standards. CD currently has 80% of its fleet running on two shifts compared to 50% for Singapore’s overall taxi fleet. During peak hour periods, it is likely that percentage of its taxis on the road averages above 90% (compared to the 65-70% LTA requirement for 2013). With a high percentage of its fleet running on two shifts (implying likely longer hours on the road), its average daily mileage per taxi currently stands at 400km (versus the required 70% of taxis with min. daily mileage of 250km for 2013). As such, we believe CD would likely meet the standards set by LTA.
SMRT has room to benefit from LTA’s complementary measures. SMRT has less than 50% of its fleet running on two shifts (below Singapore’s overall 50% level). While this could imply a chance that SMRT is not meeting the minimum requirements set by LTA, we believe LTA’s measures to complement taxi availability such as (1) relaxation of CBD taxi pick up/drop off points, (2) online portal to aid matching between taxi hirers and relief drivers, and (3) discounts on Taxi Driver’s Vocational Licence renewal fee for “active” drivers, will help improve average daily mileage as well as more conversions towards double shifts.