Category: ComfortDelgro
Land Transport – DMG
Operators seek fare increase of up to 2.8%
SBS Transit and SMRT have both applied for fare hike of 2.8%, in accordance to the maximum fare adjustment formula set by the government-appointed Fare Review Mechanism Committee (FRMC) in 2005. Results of the application will most likely be announced in 4Q11 by the Public Transport Council (PTC). Given SMRT’s earnings are predominantly driven by Singapore’s train service (accounted for 58% of FY11 EBIT), it will experience the most impact compared to ComfortDelGro (CD). Our sensitivity analysis shows that a fare hike of 2.8% could raise SMRT’s and CD’s net profit by 11% and 6.6% respectively. Maintain OVERWEIGHT on the sector on the back of 1) resilient growth in ridership number, 2) potential fare hike, and 3) imminent award of Downtown Line in 2H11.
Maximum fare adjustment formula is tied to CPI, WPI and productivity gains. In order to cap overall fare increases in small, regular steps, the land transport operators are allowed to apply for fare adjustments according to FRMC-stipulated formula. Besides taking into consideration of the maximum fare adjustment request put forth by operators, the PTC also takes into consideration of other factors such as profitability of the two transport companies, as well as Singapore’s economic condition. This is evident from the fare adjustments carried out in 2008-2009 (2008: +0.7% fare hike; 2009: -4.6% fare hike) vs maximum allowable adjustments of +3%-+4.8% respectively. Our current estimates for both SMRT and CD are based on ~0.5% hike in fare prices of Singapore’s MRT and bus services.
Prefer CD within the sector. We continue to favour CD (BUY/TP S$1.80) over SMRT (NEUTRAL/TP S$1.94) due to the former’s 1) greater overseas growth potential, and 2) cheaper valuation. In addition to margin improvements from ridership increase, we think CD will be looking at acquisition of more land transport companies in foreign markets in order to achieve overseas growth. Separately, previous concerns regarding CD’s forex exposure due to its extensive overseas operations in UK & Ireland (9M10: 13% CD’s EBIT), Australia (9M10: 16% CD’s EBIT), and China (9M10: 12% CD’s EBIT) is overblown, evidenced from the minute forex impact on CD’s results in the last three quarters. Given the approximately even contributions from the emerging (China) and developed nations (UK, Ireland, Australia), we reckon the chances of adverse forex movement from sustained strengthening of S$ against the local currencies of CD’s overseas operations as low.
Land Transport – DMG
Operators seek fare increase of up to 2.8%
SBS Transit and SMRT have both applied for fare hike of 2.8%, in accordance to the maximum fare adjustment formula set by the government-appointed Fare Review Mechanism Committee (FRMC) in 2005. Results of the application will most likely be announced in 4Q11 by the Public Transport Council (PTC). Given SMRT’s earnings are predominantly driven by Singapore’s train service (accounted for 58% of FY11 EBIT), it will experience the most impact compared to ComfortDelGro (CD). Our sensitivity analysis shows that a fare hike of 2.8% could raise SMRT’s and CD’s net profit by 11% and 6.6% respectively. Maintain OVERWEIGHT on the sector on the back of 1) resilient growth in ridership number, 2) potential fare hike, and 3) imminent award of Downtown Line in 2H11.
Maximum fare adjustment formula is tied to CPI, WPI and productivity gains. In order to cap overall fare increases in small, regular steps, the land transport operators are allowed to apply for fare adjustments according to FRMC-stipulated formula. Besides taking into consideration of the maximum fare adjustment request put forth by operators, the PTC also takes into consideration of other factors such as profitability of the two transport companies, as well as Singapore’s economic condition. This is evident from the fare adjustments carried out in 2008-2009 (2008: +0.7% fare hike; 2009: -4.6% fare hike) vs maximum allowable adjustments of +3%-+4.8% respectively. Our current estimates for both SMRT and CD are based on ~0.5% hike in fare prices of Singapore’s MRT and bus services.
Prefer CD within the sector. We continue to favour CD (BUY/TP S$1.80) over SMRT (NEUTRAL/TP S$1.94) due to the former’s 1) greater overseas growth potential, and 2) cheaper valuation. In addition to margin improvements from ridership increase, we think CD will be looking at acquisition of more land transport companies in foreign markets in order to achieve overseas growth. Separately, previous concerns regarding CD’s forex exposure due to its extensive overseas operations in UK & Ireland (9M10: 13% CD’s EBIT), Australia (9M10: 16% CD’s EBIT), and China (9M10: 12% CD’s EBIT) is overblown, evidenced from the minute forex impact on CD’s results in the last three quarters. Given the approximately even contributions from the emerging (China) and developed nations (UK, Ireland, Australia), we reckon the chances of adverse forex movement from sustained strengthening of S$ against the local currencies of CD’s overseas operations as low.
ComfortDelgro – Phillip
Buying in at trough valuations
•Current valuation for the stock overly pessimistic
•Defensive stock for uncertain times
•Trading at discount to closest peer
•Forex remains the key risk to our forecasts
•Maintain Buy with target price of S$2.01
A defensive stock for uncertain times
Being a land transport operator, we opine that ComfortDelGro (CDG) has valuable defensive characteristics against a backdrop of uncertain economic environment. Currently, we see relatively little downside risk to our profit growth estimates of 2% for FY11. In fact, the company’s bus business could even see improved profitability resulting from lower oil prices in a global economic slowdown. Majority of the company’s business are non-discretionary and are fairly resilient against a weakening economy.
Undervalued against closest peer
While SMRT and CDG are not directly comparable due to their varied business exposure, their valuation remains the benchmark to the land transport sector on the SGX. CDG currently trades at a discount to its closest peer, SMRT, when compared using the P/E and P/B multiples. Even with our conservative payout ratio assumption of 55% for CDG, the stock offers a fairly similar dividend yield of 4.5% with SMRT.
Key risks lies in forex
With its global exposure, the key risk for CDG lies with potentially lower earnings from weaker forex translation. We estimate that CDG has the highest forex operating profit exposure to AUD (c.20%), GBP (c.13%) & RMB (c.11%) and would be negatively impacted by a depreciation of these currencies against the SGD.
Trading at only 12X T12M EPS
CDG’s share price continues to drift lower in line with the weak market sentiments. We view current market valuations of merely 12X T12M EPS as overly pessimistic, considering the historical +/- 1S.D. P/E range of 13.5 to 16.6X. Even during the GFC, CDG traded below current valuations for less than a fortnight in Oct-Nov 2008.
Valuation. We used a blended valuation model of DCF (COE: 8.2%, terminal g: 1%) and P/E (17X FY11e PATMI) to arrive at our target price of S$2.01. CDG could potentially return 52.1% after incorporating our forecasted dividends of 6.1¢ over the next 12months. Hence, we maintain our Buy call on CDG.
ComfortDelgro – Phillip
Buying in at trough valuations
•Current valuation for the stock overly pessimistic
•Defensive stock for uncertain times
•Trading at discount to closest peer
•Forex remains the key risk to our forecasts
•Maintain Buy with target price of S$2.01
A defensive stock for uncertain times
Being a land transport operator, we opine that ComfortDelGro (CDG) has valuable defensive characteristics against a backdrop of uncertain economic environment. Currently, we see relatively little downside risk to our profit growth estimates of 2% for FY11. In fact, the company’s bus business could even see improved profitability resulting from lower oil prices in a global economic slowdown. Majority of the company’s business are non-discretionary and are fairly resilient against a weakening economy.
Undervalued against closest peer
While SMRT and CDG are not directly comparable due to their varied business exposure, their valuation remains the benchmark to the land transport sector on the SGX. CDG currently trades at a discount to its closest peer, SMRT, when compared using the P/E and P/B multiples. Even with our conservative payout ratio assumption of 55% for CDG, the stock offers a fairly similar dividend yield of 4.5% with SMRT.
Key risks lies in forex
With its global exposure, the key risk for CDG lies with potentially lower earnings from weaker forex translation. We estimate that CDG has the highest forex operating profit exposure to AUD (c.20%), GBP (c.13%) & RMB (c.11%) and would be negatively impacted by a depreciation of these currencies against the SGD.
Trading at only 12X T12M EPS
CDG’s share price continues to drift lower in line with the weak market sentiments. We view current market valuations of merely 12X T12M EPS as overly pessimistic, considering the historical +/- 1S.D. P/E range of 13.5 to 16.6X. Even during the GFC, CDG traded below current valuations for less than a fortnight in Oct-Nov 2008.
Valuation. We used a blended valuation model of DCF (COE: 8.2%, terminal g: 1%) and P/E (17X FY11e PATMI) to arrive at our target price of S$2.01. CDG could potentially return 52.1% after incorporating our forecasted dividends of 6.1¢ over the next 12months. Hence, we maintain our Buy call on CDG.
ComfortDelgro – DBSV
1Q results within expectations
At a Glance
• 1Q11 results within our expectations
• Margins lower on oil price, staff costs – as expected
• Higher oil prices already factored in our forecasts
• Maintain Buy and S$1.86 TP
Comment on Results
Results in line. Results for 1Q11 were within our expectations. Revenue grew by 4.7% y-o-y to S$803m while net profit declined 7.7% to S$50.1m. Revenue was driven by growth in all business segments especially from taxi, bus and rail, while the fall in earnings was a result of higher operating costs.
Higher operating costs weighed on margins, but within expectations. EBIT margin was 1ppt lower at 10.8%, dragged by higher oil prices, staff costs, lower average bus fares and currency translation losses. Higher oil prices resulted in increase of fuel and electricity costs (+18%), and diesel resale costs in material & consumables expenses (+26%). Staff costs (+4%) were higher as Job Credits ceased and increased staff hiring in Australia. Daily ridership for Singapore bus and rail increased by 7.6% and 17.3% y-o-y, but this was partially offset by a lower average fares due to distance-based fares. Balance sheet strengthened as net debt improved from 6.1% in 4Q10 to 4.4% in 1Q11, which continues to put the Group in a good position to pursue acquisitions.
Higher oil prices already factored in our forecasts. CD will continue to benefit from higher ridership and taxi fleet in Singapore. Management continues to hedge 20% of fuel requirements monthly. We have already factored in an average oil price of US$105/bbl in our forecasts, which is still above the YTD average price, despite the recent volatility. Successful bid for the Downtown Line may serve as a longer-term catalyst.
Recommendation
More attractively valued than SMRT, Maintain Buy TPS$1.86. We continue to like CD for its more attractive valuation and geographical diversity it offers in the land transport sector. CD currently trades at 13.6x FY11F PE compared to SMRT’s 18x FY11F PE. Our TP of S$1.86 is based on 15x FY11F PE and DCF (WACC 10%, t=1%).