Slowly but surely delivering

• A record 3Q12 net profit – within expectations
  
• EBIT margins remained stable despite cost challenges
  
• Trades below historical average even with YTD share price appreciation of c.19%
  
• Maintain BUY, TP: S$1.86. Preferred land transport counter over SMRT
  

3Q12 within expectations. 3Q12’s net profit reached a record of S$72.8m, which was up by 5.4% y-o-y, on the back of a 2.7% growth in revenue to S$900.8m. Revenue growth was broad-based driven, by all business segments except Automotive Engineering. 9M12 profits account for 77% of our FY12F forecasts, roughly in line with previous year (1H11 76% of FY11).

EBIT margins remained at 13%. EBIT margins remained at 13% even though the group operates in a higher cost environment. This was helped by mainly lower material and consumables (-10.6%) and energy & fuel (-6.2%), offset by higher staff costs (+5.9%), contract services (+14.5%) and repair & maintenance (+8.1%). Management has hedged a substantial portion of its energy and fuel needs into FY13.

Preferred land transport counter, Maintain BUY with TP of S$1.86. We continue to like CD for its stable earnings growth profile, geographical diversification despite challenges for its bus business in Singapore and start up costs for rail (DTL). We expect its diversification to aid in buffering the impact from weaker segments. Despite rising by c.19.4% YTD, the counter still trades -0.5 std dev below its historical average of c.15x, and is preferred over SMRT which trades at a higher c.18x FYE Mar14 PE. We also believe it has the ability to further increase its dividend payout ratio (FY11: 53%), and should be a catalyst for the stock price should this materialis. We are currently assuming a conservative payout ratio of only 55% in our forecasts.

Delivering the Goods

Positive 3QFY12 results delivered. ComfortDelGro (CDG) delivered a positive set of 3QFY12 results, recording a 5.4% YoY increase (+SGD3.7m) in PATMI to SGD72.8m. These results were largely in line with expectations given that 9MFY12 PATMI comprised 78-79% of ours and consensus’ full-year estimates, and noting that 4Q has been a historically weaker quarter. We maintain our BUY call on CDG as our preference in the Singapore Land Transport sector, Target Price unchanged at SGD1.94.

Taxis once again lead profit growth. CDG’s 3QFY12 operating profit growth of 2.8% (+SGD3.2m) YoY was boosted by its taxi segment which showed an improvement of 8% (+SGD3.0m). In particular, the Singapore taxi segment drove the profit growth, as it was a beneficiary of higher rental income from replacement taxis and a larger fleet, as well as a higher volume of cashless transactions.

Buses and Rail bring up the rear. CDG’s bus business recorded a marginal operating profit growth of 1% YoY (+SGD0.6m), primarily helped by its UK and Australia businesses growing 6% and 2% respectively. The rail segment was the poorest performer, showing a 63% drop YoY (-SGD4.5) in operating profit, caused by start-up staff costs of the Downtown Line and higher repair and maintenance costs.

Outlook of revenue growth. Management’s revenue outlook remained upbeat, as it expects revenue to grow or at least be maintained in all segments except its bus business in China (divestment of Shenyang CDG) and its taxi business in UK (UK austerity measures).

Maintain BUY, reiterate preference over SMRT. We continue to prefer CDG in the Singapore land transport sector for its diversified business model, which not only provides additional avenues for growth, but also shields it from country-specific challenges (eg: Singapore). We leave our forecasts largely intact, and reiterate our BUY call and Target Price of SGD1.94, which is pegged to 16x FY13 PER.

Delivering the Goods

Positive 3QFY12 results delivered. ComfortDelGro (CDG) delivered a positive set of 3QFY12 results, recording a 5.4% YoY increase (+SGD3.7m) in PATMI to SGD72.8m. These results were largely in line with expectations given that 9MFY12 PATMI comprised 78-79% of ours and consensus’ full-year estimates, and noting that 4Q has been a historically weaker quarter. We maintain our BUY call on CDG as our preference in the Singapore Land Transport sector, Target Price unchanged at SGD1.94.

Taxis once again lead profit growth. CDG’s 3QFY12 operating profit growth of 2.8% (+SGD3.2m) YoY was boosted by its taxi segment which showed an improvement of 8% (+SGD3.0m). In particular, the Singapore taxi segment drove the profit growth, as it was a beneficiary of higher rental income from replacement taxis and a larger fleet, as well as a higher volume of cashless transactions.

Buses and Rail bring up the rear. CDG’s bus business recorded a marginal operating profit growth of 1% YoY (+SGD0.6m), primarily helped by its UK and Australia businesses growing 6% and 2% respectively. The rail segment was the poorest performer, showing a 63% drop YoY (-SGD4.5) in operating profit, caused by start-up staff costs of the Downtown Line and higher repair and maintenance costs.

Outlook of revenue growth. Management’s revenue outlook remained upbeat, as it expects revenue to grow or at least be maintained in all segments except its bus business in China (divestment of Shenyang CDG) and its taxi business in UK (UK austerity measures).

Maintain BUY, reiterate preference over SMRT. We continue to prefer CDG in the Singapore land transport sector for its diversified business model, which not only provides additional avenues for growth, but also shields it from country-specific challenges (eg: Singapore). We leave our forecasts largely intact, and reiterate our BUY call and Target Price of SGD1.94, which is pegged to 16x FY13 PER.

Highlights from 2Q12 results luncheon

We hosted ComfortDelGro (CD) for a post 2Q12 results luncheon. Management’s tone was positive: (1) Continues to see opportunities in Singapore taxi market (2) Confident in meeting taxi availability standards (3) BSEP to have neutral impact to CD’s earnings (4) China and Australia are targets for future expansion.

Well positioned as the dominant Taxi player in Singapore. Management shared that despite rising COE prices, it still believes in opportunities for growth in Singapore’s taxi market in the form of cashless transaction volumes and taxi bookings. CD has not increased rental rates for its newest batch of taxis and believes that operating margins of 11-12% still makes it an attractive business to hold on to.

CD likely to have less difficulty meeting taxi availability standards. On recent steps the government is taking to improve taxi availability, CD shared that about 80% of its taxi fleet runs on two shifts (two drivers sharing rental of one taxi). It believes that its performance on taxi availability standards would likely exceed the rest of the industry that is likely to have less than 50% of fleet running on two shifts.

“Earnings neutral” in Bus Services Enhancement Programme (BSEP). CD notes that although the government will be paying for buses as well as operating expenses under the BSEP, these will be taken onto CD’s books under assets and balanced with a liability to the government. A revenue grant will also be provided to offset against the depreciation of these assets.

Though CD will benefit from cost efficiencies from the increased fleet size, the government will charge CD its share of cost on an average cost basis. The recent increase in bus driver wages will also be borne by the government and there will not be anymore wage increase in Jan 2013. The BSEP is expected to have a neutral impact to CD’s earnings and CD could receive reimbursement through various income streams such as waived depot charges.

China and Australia targeted for expansion. CD has highlighted China and Australia as possible destinations for overseas expansion opportunities. Management commented that acquisitions should ideally range between S$50-S$100m but added that even a more sizable transaction in the likes of a few hundred million dollars would be achievable. CD targets investments that can generate an IRR of mid teens over a 10 year period.

Highlights from 2Q12 results luncheon

We hosted ComfortDelGro (CD) for a post 2Q12 results luncheon. Management’s tone was positive: (1) Continues to see opportunities in Singapore taxi market (2) Confident in meeting taxi availability standards (3) BSEP to have neutral impact to CD’s earnings (4) China and Australia are targets for future expansion.

Well positioned as the dominant Taxi player in Singapore. Management shared that despite rising COE prices, it still believes in opportunities for growth in Singapore’s taxi market in the form of cashless transaction volumes and taxi bookings. CD has not increased rental rates for its newest batch of taxis and believes that operating margins of 11-12% still makes it an attractive business to hold on to.

CD likely to have less difficulty meeting taxi availability standards. On recent steps the government is taking to improve taxi availability, CD shared that about 80% of its taxi fleet runs on two shifts (two drivers sharing rental of one taxi). It believes that its performance on taxi availability standards would likely exceed the rest of the industry that is likely to have less than 50% of fleet running on two shifts.

“Earnings neutral” in Bus Services Enhancement Programme (BSEP). CD notes that although the government will be paying for buses as well as operating expenses under the BSEP, these will be taken onto CD’s books under assets and balanced with a liability to the government. A revenue grant will also be provided to offset against the depreciation of these assets.

Though CD will benefit from cost efficiencies from the increased fleet size, the government will charge CD its share of cost on an average cost basis. The recent increase in bus driver wages will also be borne by the government and there will not be anymore wage increase in Jan 2013. The BSEP is expected to have a neutral impact to CD’s earnings and CD could receive reimbursement through various income streams such as waived depot charges.

China and Australia targeted for expansion. CD has highlighted China and Australia as possible destinations for overseas expansion opportunities. Management commented that acquisitions should ideally range between S$50-S$100m but added that even a more sizable transaction in the likes of a few hundred million dollars would be achievable. CD targets investments that can generate an IRR of mid teens over a 10 year period.