• 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.

Within our expectations

•FY10 revenue came in at S$3,206m (+5.1% y-y) while net profit was up 4.1% y-y to S$228.5m, both were inline with our expectations

•Growth across all segments especially Australian Bus business

•Forecasting revenues and net profits of S$3,285m and S$224m for FY11

•Maintain Buy recommendation with fair value of S$1.81

FY10 results were inline with our estimates

Revenue was up 5.1% y-y to S$3,206.9m due to broad based growth across most segments especially the Australia bus business whose revenues increased by 35.1% y-y. Revenues could have been higher by S$51m but was affected by the weaker pound and RMB. Operating profit was up 11.0% due to the increase in revenue and smaller increases in operating expenses. Operating margin also improves to 12.1% from 11.5% despite the inflationary environment and high crude oil prices. Net profit came in at S$228.5m (+4.1% y-y). FY10 results were inline with our estimates; revenues were slightly higher than our estimates of S$3,205m and net profit was marginally lower than our estimates of S$230m. CDG also announces a final dividend of S$0.028 bringing the total dividends for FY10 to S$0.055 translating to a dividend yield of 3.5%.

Forecasting revenues and net profits of S$3,285m and S$224m for FY11

We are forecasting for revenues to come in S$3,285m and net profits of S$224m for FY11 due to the high inflationary environment and higher fuel and energy costs. Based on FY10 results, fuel and staff costs contributed about 43.5% of their total operating expenses. Furthermore public transport operators will not be able to increase their fares for the rest of the year as the fare revision exercise has been postponed to the 4th quarter of 2011. On the back of these factors, we are forecasting the net profit to come in at S$224m for FY11 which is 2% lower than that of FY10. Nevertheless, valuation for CDG still looks attractive at the current price.

Outlook for the rest of the year

Record tourism arrivals will continue to contribute strongly to the growth of its Singapore taxi business for FY11. Australia bus business will continue to improve as they increase the number of services, management also revealed that they are bidding for more services in Australia. Singapore rail and bus ridership will continue to improve with the improved connectivity of public transport and the high costs associated with owning a car.

Valuation and Recommendation

We are reiterating our Buy recommendation and fair value of S$1.81 on CDG to reflect the broad based growth across its entire business segment and its attractive valuation at the current moment. CDG is currently trading at a PE of 14.6X FY10 EPS as compared to SMRT which is trading at 19X FY10 which we think that CDG is very undervalued at the current moment. Our fair value translates to 17.3X FY11E EPS.

Within our expectations

•FY10 revenue came in at S$3,206m (+5.1% y-y) while net profit was up 4.1% y-y to S$228.5m, both were inline with our expectations

•Growth across all segments especially Australian Bus business

•Forecasting revenues and net profits of S$3,285m and S$224m for FY11

•Maintain Buy recommendation with fair value of S$1.81

FY10 results were inline with our estimates

Revenue was up 5.1% y-y to S$3,206.9m due to broad based growth across most segments especially the Australia bus business whose revenues increased by 35.1% y-y. Revenues could have been higher by S$51m but was affected by the weaker pound and RMB. Operating profit was up 11.0% due to the increase in revenue and smaller increases in operating expenses. Operating margin also improves to 12.1% from 11.5% despite the inflationary environment and high crude oil prices. Net profit came in at S$228.5m (+4.1% y-y). FY10 results were inline with our estimates; revenues were slightly higher than our estimates of S$3,205m and net profit was marginally lower than our estimates of S$230m. CDG also announces a final dividend of S$0.028 bringing the total dividends for FY10 to S$0.055 translating to a dividend yield of 3.5%.

Forecasting revenues and net profits of S$3,285m and S$224m for FY11

We are forecasting for revenues to come in S$3,285m and net profits of S$224m for FY11 due to the high inflationary environment and higher fuel and energy costs. Based on FY10 results, fuel and staff costs contributed about 43.5% of their total operating expenses. Furthermore public transport operators will not be able to increase their fares for the rest of the year as the fare revision exercise has been postponed to the 4th quarter of 2011. On the back of these factors, we are forecasting the net profit to come in at S$224m for FY11 which is 2% lower than that of FY10. Nevertheless, valuation for CDG still looks attractive at the current price.

Outlook for the rest of the year

Record tourism arrivals will continue to contribute strongly to the growth of its Singapore taxi business for FY11. Australia bus business will continue to improve as they increase the number of services, management also revealed that they are bidding for more services in Australia. Singapore rail and bus ridership will continue to improve with the improved connectivity of public transport and the high costs associated with owning a car.

Valuation and Recommendation

We are reiterating our Buy recommendation and fair value of S$1.81 on CDG to reflect the broad based growth across its entire business segment and its attractive valuation at the current moment. CDG is currently trading at a PE of 14.6X FY10 EPS as compared to SMRT which is trading at 19X FY10 which we think that CDG is very undervalued at the current moment. Our fair value translates to 17.3X FY11E EPS.

ComfortDelGro full-year net up 4% to $228.5m

Revenue increased 5.1% to a record $3.21b on broad- based growth

COMFORTDELGRO’S net profit edged up 4.1 per cent to $228.5 million for the full year ended Dec 31, 2010, as taxation for the land transport giant rose 33.7 per cent to $78.1 million.

Revenue increased 5.1 per cent to a record $3.21 billion on broad-based growth. The world’s second-largest land transport group said group revenue would have been $206.1 million, or 6.8 per cent, higher if not for the negative foreign currency effect.

The group posted 11 per cent higher operating profit at $388.4 million, while earnings per share were 10.95 cents – up from 10.52 cents a year ago.

‘We are pleased that we have continued to grow both our topline and bottom line for the year just ended,’ said ComfortDelGro managing director and group CEO Kua Hong Pak.

‘We have also expanded our global fleet to more than 46,000 vehicles, giving us the flexibility to do even more in terms of leveraging on technology.’

Growth was recorded from all business segments except automotive engineering services. Revenue for the group’s full-year bus business climbed 5.3 per cent to $1.61 billion, although this was partly eroded by the negative foreign currency translation effect of $25.8 million. Operating profit of $149.2 million for 2010 was 20.4 per cent higher than in 2009.

ComfortDelGro added that the overseas bus business continued to power ahead by accounting for 72.5 per cent of group bus operating profit – the first time it has crossed the 70 per cent mark.

The taxi business saw revenue rise 5.9 per cent to $981.9 million, thanks partly to Singapore’s higher rental income from a larger fleet and more new replacement taxis and a higher volume of cashless transactions. Singapore’s taxi business revenue was 9.6 per cent higher at $696 million, contributing to overall operating profit of $76.4 million, or a jump of 30.8 per cent.

Revenue from the rail business was 11.5 per cent higher at $121.7 million on the increase in average daily riderships on the North East Line and Light Rail Transit, leading to operating profit rising 24.9 per cent to $25.6 million.

But revenue from the automotive engineering services business was $11.2 million lower at $395.1 million, mainly on fewer buses assembled and the divestment of the car dealership business in Chengdu. Operating profit of $39.1 million was $12.1 million less due to the lower revenue and higher cost of materials.

Over at the vehicle inspection and testing business, revenue grew $6.5 million to $86 million because of the higher number of cars inspected by Vicom and higher sales achieved by Setsco Services. Operating profit rose $2.6 million to $27.3 million.

As for group operating expenses, they rose 4.3 per cent to $2.82 billion due to, among other things, increases in payments to drivers for contract services in line with the increases in cashless transactions, contracted services for the Youth Olympic Games and Irish Citylink, higher staff costs, higher fuel and electricity costs, and higher depreciation and amortisation with a newer fleet.

Other contributing factors were higher costs of diesel purchased for resale, and higher road and diesel taxes from the absence of savings from the Singapore government Budget.

New taxi licence award in Chengdu, China

ComfortDelGro (CD) becomes the 2nd largest taxi operator in Chengdu with latest taxi licence award. CD’s wholly-owned subsidiary Chengdu ComfortDelGro Taxi Co has been awarded 800 new taxi licences by the Chengdu Municipal Government. Based on the assumption that the 800 new Sagitar taxis will be added gradually throughout 2011, we raised our FY11F-FY12F PATMI by 0.4%-1.0% respectively. Our TP is also raised marginally from S$1.85 to S$1.87 based on discounted cash flow valuation (WACC: 8.8%; Terminal growth rate: 1.3%). Maintain BUY.

First foray into Chengdu taxi market began in 2004. CD’s taxi operations in Chengdu began in 2004 when it entered into a joint venture with a local entrepreneur to operate 90 taxis for RMB26m. Subsequently, CD augmented its taxi fleet size to 250 in Chengdu via taxi licence award in 2007 and acquisitions of existing licences. Following the latest licence win, CD’s taxi fleet size in Chengdu will be augmented to 1,050 by end 2011. Assuming a Sagitar taxi costs around RMB1205-RMB170k, we think that the incremental capex for the taxi fleet size expansion is ~S$20m-S$30m. The new licences will be renewed annually at RMB10k/licence/year. Separately, we estimate the 800 new Sagitar taxi additions will add S$1m-S$3m to CD’s bottomline a year.

Latest win proves CD is well-positioned for overseas growth. We continue to believe that CD enjoys better overseas growth opportunities over SMRT given its sizeable presence in both emerging and developed markets like China (9M10: 12% EBIT), Australia (9M10: 16% EBIT), and UK/Ireland (9M10: 13% EBIT). Despite the greater growth potential, CD is currently trading at a cheaper valuation of 14x FY11F PATMI vis-à-vis SMRT’s 18x FY11F PATMI. Hence, we reiterate our preference for CD over SMRT within the land transport sector. Key risks of CD are i) adverse forex movements, ii) sharp rise in oil price, and iii) liberalisation of bus sector in Singapore which may undermine CD’s dominant position.