Latent potential with overseas venture

•Strong potential with CDG’s venture overseas

•Limited exposure to energy price increase

•NEL should continue to perform well; stronger than expected overseas performance is the wild card

•We revised our PATMI estimates upwards for FY11E by 5.6% and introduce FY12/13E estimates

•Maintain Buy following a change of analyst with revised target price of S$2.01

INVESTMENT MERITS:

Global diversification. We believe that CDG’s efforts to grow its businesses beyond Singapore could lead to significant earnings growth in the future. It also reduces their dependency on the Singapore market, which has a limited scope for land transport growth.

NEL likely to do well. CDG’s rail system serves the populous areas in the North-East of Singapore. We expect continued population growth to increase ridership for their rail business.

Limited exposure to energy price increase. Exposure to energy cost is a typical concern of investing into transportation businesses. However, we believe that CDG is less exposed to potential energy price increase than its peers due to their diversified businesses and varied business models.

Licenses & Operating rights protect competitive position. We observed sustainable profitability at some of CDG’s overseas subsidiaries, which we believe could be attributable to a protected competitive position.

KEY CHALLENGES:

Singapore Bus. We expect CDG’s bus business to be affected by the growth of rail network in Singapore. Plans to extend Singapore’s rail network to 270km by 2020 is likely to result in significant cannibalization of ridership from bus operations. With a 75% market share, we foresee long term challenges for CDG’s public bus operations in Singapore. CCL’s full opening at the end of 2011 will be the near term headwind for the company.

M & A. CDG aims to derive 70% of its revenue from overseas in the long run. While we are supportive of its venture overseas, we believe that there are inherent challenges and risks in growing their businesses overseas.

Key Risks. Regulatory; Forex; M & A.

Valuation. The current market price values the stock at 14X T12M EPS, which is at the lower end of the stock’s historical trading range. Due to our expectations of robust growth in the near future, we opine that the stock deserves an above average 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. With an upside of 33.4% to the last trading price, we maintain our Buy call on CDG with a revised target price.

Latent potential with overseas venture

•Strong potential with CDG’s venture overseas

•Limited exposure to energy price increase

•NEL should continue to perform well; stronger than expected overseas performance is the wild card

•We revised our PATMI estimates upwards for FY11E by 5.6% and introduce FY12/13E estimates

•Maintain Buy following a change of analyst with revised target price of S$2.01

INVESTMENT MERITS:

Global diversification. We believe that CDG’s efforts to grow its businesses beyond Singapore could lead to significant earnings growth in the future. It also reduces their dependency on the Singapore market, which has a limited scope for land transport growth.

NEL likely to do well. CDG’s rail system serves the populous areas in the North-East of Singapore. We expect continued population growth to increase ridership for their rail business.

Limited exposure to energy price increase. Exposure to energy cost is a typical concern of investing into transportation businesses. However, we believe that CDG is less exposed to potential energy price increase than its peers due to their diversified businesses and varied business models.

Licenses & Operating rights protect competitive position. We observed sustainable profitability at some of CDG’s overseas subsidiaries, which we believe could be attributable to a protected competitive position.

KEY CHALLENGES:

Singapore Bus. We expect CDG’s bus business to be affected by the growth of rail network in Singapore. Plans to extend Singapore’s rail network to 270km by 2020 is likely to result in significant cannibalization of ridership from bus operations. With a 75% market share, we foresee long term challenges for CDG’s public bus operations in Singapore. CCL’s full opening at the end of 2011 will be the near term headwind for the company.

M & A. CDG aims to derive 70% of its revenue from overseas in the long run. While we are supportive of its venture overseas, we believe that there are inherent challenges and risks in growing their businesses overseas.

Key Risks. Regulatory; Forex; M & A.

Valuation. The current market price values the stock at 14X T12M EPS, which is at the lower end of the stock’s historical trading range. Due to our expectations of robust growth in the near future, we opine that the stock deserves an above average 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. With an upside of 33.4% to the last trading price, we maintain our Buy call on CDG with a revised target price.

Opportunity within turmOIL

• Market overpricing risk of high oil price in SIA and CD

• Raised oil price assumptions to stay on the conservative side

• Demand and trade are key for airlines and container liners, while oil accounts for a relatively small proportion of land transport operators’ costs

• Our picks are SIA for rebound and CD for value

Opportunity within turmoil. We believe market has more than factored in the current high prices due to the current Mid-East turmoil. Opportunity to buy SIA, which seems oversold, and CD, which offers value.

Raising oil price assumptions. No one is certain how long the current Mid-East turmoil will last, or if it will spread. To stay on the conservative side of our earnings forecasts, we have raised our oil/jet fuel/ bunker price assumptions up by 10-20%, which has resulted in a downward revision in earnings of 4%-10%. At current oil price, we believe margins would no doubt be squeezed, but these companies should still remain profitable. We summarise our views for the respective subsectors:

• Air: At US$125/130 per barrel, this level of jet fuel price is high but manageable for the airlines. We believe demand is still the key for airlines and see SIA to be better poised to pass on costs.

• Land: Fuel accounts for c.9-15% operators’ topline and a US$10/bbl change in oil price could impact bottomline by c.7-9%. We believe CD will be more resilient vis-à-vis SMRT in this current environment given it has hedged 20% of 2011 requirements.

• Sea: Trade growth is the key factor driving NOL’s profitability. We believe rising bunker costs will not impact NOL’s earnings too significantly, as long as there is no demand destruction.

Buy SIA for rebound potential; CD for value. At current share prices, our analysis (based on our forecasting model) suggests that the market is factoring in jet fuel price of US$150 for SIA and oil price of US$130 for CD, which is way above current levels (Jet fuel: US$130; WTI: US$105). Given our view that SIA was sold down mainly on concerns of high oil prices, we believe SIA should offer the strongest rebound potential, if oil price retreats. Our picks are SIA (Buy, TP: S$17.30) and CD (Buy, TP: S$1.86). We maintain our Hold recommendations for NOL (TP S$2.15), MRT (TP lowered to S$2.03) and TGR (TP lowered to S$1.60).

Opportunity within turmOIL

• Market overpricing risk of high oil price in SIA and CD

• Raised oil price assumptions to stay on the conservative side

• Demand and trade are key for airlines and container liners, while oil accounts for a relatively small proportion of land transport operators’ costs

• Our picks are SIA for rebound and CD for value

Opportunity within turmoil. We believe market has more than factored in the current high prices due to the current Mid-East turmoil. Opportunity to buy SIA, which seems oversold, and CD, which offers value.

Raising oil price assumptions. No one is certain how long the current Mid-East turmoil will last, or if it will spread. To stay on the conservative side of our earnings forecasts, we have raised our oil/jet fuel/ bunker price assumptions up by 10-20%, which has resulted in a downward revision in earnings of 4%-10%. At current oil price, we believe margins would no doubt be squeezed, but these companies should still remain profitable. We summarise our views for the respective subsectors:

• Air: At US$125/130 per barrel, this level of jet fuel price is high but manageable for the airlines. We believe demand is still the key for airlines and see SIA to be better poised to pass on costs.

• Land: Fuel accounts for c.9-15% operators’ topline and a US$10/bbl change in oil price could impact bottomline by c.7-9%. We believe CD will be more resilient vis-à-vis SMRT in this current environment given it has hedged 20% of 2011 requirements.

• Sea: Trade growth is the key factor driving NOL’s profitability. We believe rising bunker costs will not impact NOL’s earnings too significantly, as long as there is no demand destruction.

Buy SIA for rebound potential; CD for value. At current share prices, our analysis (based on our forecasting model) suggests that the market is factoring in jet fuel price of US$150 for SIA and oil price of US$130 for CD, which is way above current levels (Jet fuel: US$130; WTI: US$105). Given our view that SIA was sold down mainly on concerns of high oil prices, we believe SIA should offer the strongest rebound potential, if oil price retreats. Our picks are SIA (Buy, TP: S$17.30) and CD (Buy, TP: S$1.86). We maintain our Hold recommendations for NOL (TP S$2.15), MRT (TP lowered to S$2.03) and TGR (TP lowered to S$1.60).

• There is little in Comfort Delgro’s Q4 results (net profit almost unchanged at $54.6 mln) to enthuse investors, other than perhaps the moderate 0.13 cent / 5% increase in final dividend to 2.8 cents (reflecting the 4.1% profit increase for the full year), and bringing the total for the year to 5.5 cents vs 5.3 cents for 2009. Yield is 3.5% @ $1.56. (SMRT, at $2.04 offers a superior 4.2% yield based on 8.5 cents for the 12 months to Sept ’10.)

• Operationally, there is also little to suggest Comfort Delgro is about to break out of its tight price range: since mid ’09, the stock has, with brief exceptions, largely traded between $1.45-1.54. The recent high was $1.69 reached a year ago.

• One of the reasons for our lack of enthusiasm is the group’s regional diversification (buses and taxis in UK, China, Australia), which does not appear to have found favor with local investors either despite BUY calls by many. Indeed, the latest period was affected by the weakness of sterling pound and to some extent renminbi.

• We maintain the only company within the group worth investing in is Vicom, which however is so thinly traded.

• Prospects for the vehicle inspection business remain strong given the age profile of vehicles in Singapore, as well as the sharp drop in vehicle deregistrations.

• Vicom declared a special dividend of 3.2 cents for 2010, bringing the total to 16.1 cents (vs 11.8% for 2009) for a yield of 5.3% at $3.01 yesterday. The stock, not surprisingly is at its highest since listing in 1995.

• Vicom, which has 87.17 mln shares outstanding, is 68.19% owned by Comfort Delgro and 3.44% by Fidelity Management.