ComfortDelGro posts 7.7% drop in Q1 profit

HIGHER costs for energy as well as materials and consumables were mostly to blame for ComfortDelGro’s net profit for the first quarter ended March 31, 2011 slipping 7.7 per cent to $50.1 million.

But Q1 revenue inched up 4.7 per cent to $803 million on broad-based growth in the group’s key businesses.

Earnings per share in the first quarter fell to 2.40 cents from 2.60 cents in the previous corresponding period. The group’s net asset value per share was 88.28 cents as at March 31, 2011, from 86.20 cents three months earlier.

Q1 operating profit fell 4.1 per cent to $86.9 million as operating expenses climbed 5.9 per cent to $716.1 million mainly due to the higher cost of materials and consumables, higher fuel and electricity costs, and an increase in staff cost and the absence of Jobs Credit in Singapore.

‘The inflationary pressures in the countries we operate will continue to impact our cost of operations,’ said ComfortDelGro managing director and group CEO Kua Hong Pak. ‘Fuel and electricity costs will remain high if prices continue on the current trend.’

ComfortDelGro is the world’s second-largest transport group and revenue from its overseas operations accounted for 41.8 per cent of total group revenue – down from 42.9 per cent in the same quarter a year ago. It is targeting 70 per cent of its total revenue from overseas in the medium term.

The group’s bus business led growth in Q1 by contributing 37 per cent of the increase in group revenue. This was followed by the taxi business (32 per cent), the automotive engineering services business (11 per cent), the rail business (10 per cent) and the vehicle inspection and testing business (6 per cent). The remainder of the revenue increase (4 per cent) came from the car rental and leasing, bus station, and driving centre businesses.

Revenue from bus operations in Q1 rose 3.5 per cent to $392.6 million, as overseas bus revenue continued to exceed those of the Singapore operations by accounting for $237.9 million or 60.6 per cent of total group bus revenue.

The taxi business saw revenue rise 4.9 per cent to $248.3 million on growth in the Singapore business and the inclusion of revenue from Swan Taxis in Perth, which was acquired in October 2010. The overseas taxi segment accounted for 28.1 per cent of group taxi revenue.

Rail revenue in Q1 increased 13.1 per cent to $32.5 million as average daily ridership on the North-East Line and the two LRTs increased. Adding rental and advertising income, total rail revenue grew 11 per cent to $35.4 million.

Looking ahead, ComfortDelGro sees Singapore bus revenue rising with ridership growth. Higher ridership and hence revenue are also expected from the rail business, while revenue from the Singapore taxi business is likely to increase with more cashless transactions and new replacement taxis.

Ridership update

•Rail & Bus ridership up 16.8% & 7.6% in 1QFY11

•Increasing cost of private car ownership to encourage the use of public transport

•Singapore’s listco <20% of ComfortDelGro’s (CDG) value

•Maintain Buy with target price of S$2.01

Ridership growth continues in Singapore’s Rail & Bus business

SBST’s rail ridership grew by 16.8% y-y to 42.5mn passengers, while bus ridership grew by 7.6% to 223.2mn passengers for 1QFY11. We believe that the North-East Line (NEL) will continue to record strong ridership due to the continued residential developments in the North-Eastern corridor. While we opine that SBST’s bus business faces long term challenges from Singapore’s growth in rail network, near term incentives to switch to public modes of transportation continue to aid its short term growth.

Disincentive for private mode of transport

We believe that the strong growth in both rail and bus ridership is a reflection of a structural shift in commuter’s choice from private to public modes of transport. Over the past 3 years, public transport fares remain largely unchanged, while the cost of private car ownership surged significantly by >20%. This is led by surging pump prices, as well as soaring COE prices. We opine that the cost of private car ownership will continue to stay high and result in significant switch from private to public transport.

Singapore is just one part of the Business

CDG offers a unique exposure to the global land transport business. CDG’s stake in SBST & VICOM, which gives the Group exposure to Singapore’s rail, bus and vehicle inspection & testing business, makes up <20% of the value in CDG. The remaining c.80% CDG comprise mainly of a growing global business. We attempt to account for the value in CDG by stripping out the value of two of its listed subsidiaries (list-co), SBST and VICOM, which CDG holds a 75% and 69% stake respectively. Despite a strong share price performance in the stock of VCM (+47%) and SBST (+13%) since the start of 2010, the stock price of CDG declined by 6% over the same period.

CDG ex-listco trades within a very tight P/E range

We examined the P/E valuation of CDG ex-listco over the past 5yrs and observed a very tight +/- 1 S.D. range of 16.3X-19.7X. If history is a good guide to the stock’s future performance, these mean reversion behaviour of the stock offers a range trading opportunity for investors. CDG ex-listco only twice traded significantly out of this range in the past 5 years: on the downside during the GFC (Oct-Dec08) and on the upside during the previous market peak (Apr-Aug07). Hence, we believe current valuation of 16.9X presents a good buying opportunity on CDG.

The Global expansion continues

CDG recently announced plans to set up its 3rd driving school, Chongqing Liangjiang ComfortDelGro Driver Training Co. Ltd, in China with an investment of RMB165mn (S$31.2mn). The new driving centre is expected to house 120 vehicles and has an initial capacity of 700students per month. The two existing driving centres, Chengdu ComfortDelGro Qing Yang Driving School and Chongqing ComfortDelGro Driving Training Co. Ltd, enrolled 4,200 and 9,660 students in 2010 respectively. At full capacity, we estimate that this new driving centre would contribute c.RMB12mn of revenue per year.

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. We kept our earnings estimates unchanged pending the release of 1QFY11 results on 13th May. With an upside of 30.8% to the last trading price, we maintain our Buy call on CDG.

Ridership update

•Rail & Bus ridership up 16.8% & 7.6% in 1QFY11

•Increasing cost of private car ownership to encourage the use of public transport

•Singapore’s listco <20% of ComfortDelGro’s (CDG) value

•Maintain Buy with target price of S$2.01

Ridership growth continues in Singapore’s Rail & Bus business

SBST’s rail ridership grew by 16.8% y-y to 42.5mn passengers, while bus ridership grew by 7.6% to 223.2mn passengers for 1QFY11. We believe that the North-East Line (NEL) will continue to record strong ridership due to the continued residential developments in the North-Eastern corridor. While we opine that SBST’s bus business faces long term challenges from Singapore’s growth in rail network, near term incentives to switch to public modes of transportation continue to aid its short term growth.

Disincentive for private mode of transport

We believe that the strong growth in both rail and bus ridership is a reflection of a structural shift in commuter’s choice from private to public modes of transport. Over the past 3 years, public transport fares remain largely unchanged, while the cost of private car ownership surged significantly by >20%. This is led by surging pump prices, as well as soaring COE prices. We opine that the cost of private car ownership will continue to stay high and result in significant switch from private to public transport.

Singapore is just one part of the Business

CDG offers a unique exposure to the global land transport business. CDG’s stake in SBST & VICOM, which gives the Group exposure to Singapore’s rail, bus and vehicle inspection & testing business, makes up <20% of the value in CDG. The remaining c.80% CDG comprise mainly of a growing global business. We attempt to account for the value in CDG by stripping out the value of two of its listed subsidiaries (list-co), SBST and VICOM, which CDG holds a 75% and 69% stake respectively. Despite a strong share price performance in the stock of VCM (+47%) and SBST (+13%) since the start of 2010, the stock price of CDG declined by 6% over the same period.

CDG ex-listco trades within a very tight P/E range

We examined the P/E valuation of CDG ex-listco over the past 5yrs and observed a very tight +/- 1 S.D. range of 16.3X-19.7X. If history is a good guide to the stock’s future performance, these mean reversion behaviour of the stock offers a range trading opportunity for investors. CDG ex-listco only twice traded significantly out of this range in the past 5 years: on the downside during the GFC (Oct-Dec08) and on the upside during the previous market peak (Apr-Aug07). Hence, we believe current valuation of 16.9X presents a good buying opportunity on CDG.

The Global expansion continues

CDG recently announced plans to set up its 3rd driving school, Chongqing Liangjiang ComfortDelGro Driver Training Co. Ltd, in China with an investment of RMB165mn (S$31.2mn). The new driving centre is expected to house 120 vehicles and has an initial capacity of 700students per month. The two existing driving centres, Chengdu ComfortDelGro Qing Yang Driving School and Chongqing ComfortDelGro Driving Training Co. Ltd, enrolled 4,200 and 9,660 students in 2010 respectively. At full capacity, we estimate that this new driving centre would contribute c.RMB12mn of revenue per year.

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. We kept our earnings estimates unchanged pending the release of 1QFY11 results on 13th May. With an upside of 30.8% to the last trading price, we maintain our Buy call on CDG.

Invests S$31.2m in third driving school in China

Third driving school in China. ComfortDelGro (CD) has acquired a new site in Liangjiang New Business District, Western China, to establish its third driving school – Chongqing Liangjiang ComfortDelGro Driving Training Co (CLCDT). The site measures 44,693 sqm and will be ready by end of FY11. The three-storey building will comprise of a training centre, an administrative centre, a testing circuit, as well as a basement car park. The new school will provide driver training for saloon cars, buses as well as trucks. Total investment in the new driving school is expected to be RMB165m (S$31.2m). Upon completion, we estimate the new investment will contribute additional S$1-2m/year beginning FY12 (~0.4-0.8% of FY12 PATMI). Maintain BUY with unchanged TP of S$1.80.

Expect to house 120 vehicles and cater to initial monthly average of 700 students. During FY10, 13,860 Chinese students enrolled for CD’s two other driving school centres in China (Chengdu ComfortDelGro Qing Yang Driving School Co Ltd and Chongqing ComfortDelGro Driver Training Co Ltd). Given the FY10 EBIT contribution from CD’s China driving centres was S$1.6m, the average EBIT/student was ~S$115. Based on this, we estimate CLCDT will contribute ~S$1-2m/year beginning FY12. We think the earnings contribution from CLCDT could rise in the future once the number of student enrolment increases.

Invests S$31.2m in third driving school in China

Third driving school in China. ComfortDelGro (CD) has acquired a new site in Liangjiang New Business District, Western China, to establish its third driving school – Chongqing Liangjiang ComfortDelGro Driving Training Co (CLCDT). The site measures 44,693 sqm and will be ready by end of FY11. The three-storey building will comprise of a training centre, an administrative centre, a testing circuit, as well as a basement car park. The new school will provide driver training for saloon cars, buses as well as trucks. Total investment in the new driving school is expected to be RMB165m (S$31.2m). Upon completion, we estimate the new investment will contribute additional S$1-2m/year beginning FY12 (~0.4-0.8% of FY12 PATMI). Maintain BUY with unchanged TP of S$1.80.

Expect to house 120 vehicles and cater to initial monthly average of 700 students. During FY10, 13,860 Chinese students enrolled for CD’s two other driving school centres in China (Chengdu ComfortDelGro Qing Yang Driving School Co Ltd and Chongqing ComfortDelGro Driver Training Co Ltd). Given the FY10 EBIT contribution from CD’s China driving centres was S$1.6m, the average EBIT/student was ~S$115. Based on this, we estimate CLCDT will contribute ~S$1-2m/year beginning FY12. We think the earnings contribution from CLCDT could rise in the future once the number of student enrolment increases.