ComfortDelGro’s Q3 profit up 10.4% at $61.4m

COMFORTDELGRO has reported a 10.4 per cent rise in third-quarter net profit to $61.4 million, taking the net profit for the first nine months to $173.9 million.

Revenue for the three months ended Sept 30 rose by $40.8 million, or 5.2 per cent year on year, to a record $823.4 million.

The growth came from the bus business, the taxi business, the rail business, the vehicle inspection and testing business, the driving centre business, the bus station business and the car rental and leasing business. It was, however, offset by a drop in the automotive engineering services business.

ComfortDelGro said yesterday that the growth would have been even stronger at 7.9 per cent had it not been for the negative translation effect of the weaker British pound, Chinese yuan and Vietnamese dong.

Multiple avenues of growth

• Maintain Outperform with higher target price of S$1.90 (from S$1.83). Daily ridership for ComfortDelgro’s trains and buses has been rising almost every month since the start of the year. We keep our earnings estimates but raise our DCF-based target price to S$1.90 (WACC 8.0%) after rolling forward to CY12 and re-aligning discount rates with house rates. Trading at 13x CY11 P/E which compares favourably with its 3-year P/E average of 17x and SMRT’s 19x CY11 P/E, we believe currency risks have been priced in and recommend a switch to ComfortDelgro from SMRT. We see catalysts from higher-than-expected dividend payouts.

• Steady domestic outlook; overseas growth potential. Daily ridership for Comfortdelgro’s trains and buses has been rising almost every month since the start of the year. We see potential for ridership and margin expansion for its rail operations. Steady demand for taxis from prospective hirers could also prompt an expansion of its taxi fleet. While ComfortDelgro’s overseas ventures are not as sizeable as its local operations on an individual basis, we are positive on their higher margins and growth opportunities.

• Valuation gap. ComfortDelgro has been trading at an average discount of 18% (forward P/E) to SMRT since the start of 2008. The discount, however, has widened in 2010, arguably stemming from optimism over the new Circle Line. While SMRT’s share price has corrected slightly in the past two months following disappointments with Circle-Line ridership, ComfortDelgro still trades at a 30% discount to SMRT, despite its improving outlook vs. a loss-making Circle Line for SMRT.

Multiple avenues of growth

• Maintain Outperform with higher target price of S$1.90 (from S$1.83). Daily ridership for ComfortDelgro’s trains and buses has been rising almost every month since the start of the year. We keep our earnings estimates but raise our DCF-based target price to S$1.90 (WACC 8.0%) after rolling forward to CY12 and re-aligning discount rates with house rates. Trading at 13x CY11 P/E which compares favourably with its 3-year P/E average of 17x and SMRT’s 19x CY11 P/E, we believe currency risks have been priced in and recommend a switch to ComfortDelgro from SMRT. We see catalysts from higher-than-expected dividend payouts.

• Steady domestic outlook; overseas growth potential. Daily ridership for Comfortdelgro’s trains and buses has been rising almost every month since the start of the year. We see potential for ridership and margin expansion for its rail operations. Steady demand for taxis from prospective hirers could also prompt an expansion of its taxi fleet. While ComfortDelgro’s overseas ventures are not as sizeable as its local operations on an individual basis, we are positive on their higher margins and growth opportunities.

• Valuation gap. ComfortDelgro has been trading at an average discount of 18% (forward P/E) to SMRT since the start of 2008. The discount, however, has widened in 2010, arguably stemming from optimism over the new Circle Line. While SMRT’s share price has corrected slightly in the past two months following disappointments with Circle-Line ridership, ComfortDelgro still trades at a 30% discount to SMRT, despite its improving outlook vs. a loss-making Circle Line for SMRT.

Steady outlook

• H110 net profit of S$113m in line with ests; 48% of UBS’ 2010E forecast

Q210 revenue grew S$31m YOY: Singapore taxis, buses and rail benefitted from strong domestic demand. Australian buses gained S$23m on more services and a

10% forex impact. CDG will pay interim DPS of S$0.027 (50% payout).

• H110 op profit from S’pore taxi and bus grew 8% YOY, and rail by 34%

CDG achieved 100% utilisation (fr 99% in Q1) on a slightly enlarged taxi fleet and the outlook for coming quarters appears positive based on CDG’s comments that they now have a waiting list from drivers for their taxis, a situation which we recall has not been observed since Sg’s taxi industry was liberalised in late 2003. Meanwhile, we expect ridership growth on the North East Line (+12% YOY) to remain high. The NEL is in an operating leverage sweet spot as ridership has already passed the breakeven point, but train carriages are not filled to capacity.

• Overseas operations: Australia growth offsets weak UK taxis

In A$ terms, Australia bus revenue grew 22% YOY due to a full quarter of profit from Melbourne. QOQ, profit grew on more routes operated in both Melbourne and Sydney. CDG expects upcoming growth from Australia to stay strong as more services have been secured. CDG’s high-teen Australian margins are buffered from rising cost pressure as contract terms allow for recovery of certain costs. CDG’s acquisition of Swan Taxis in Perth for A$39m, if successful, would boost 2011E net profit by about 1.5%.

• Valuation: Price target based on UBS VCAM

We use DCF and forecast long-term valuation drivers using UBS VCAM.

Steady outlook

• H110 net profit of S$113m in line with ests; 48% of UBS’ 2010E forecast

Q210 revenue grew S$31m YOY: Singapore taxis, buses and rail benefitted from strong domestic demand. Australian buses gained S$23m on more services and a

10% forex impact. CDG will pay interim DPS of S$0.027 (50% payout).

• H110 op profit from S’pore taxi and bus grew 8% YOY, and rail by 34%

CDG achieved 100% utilisation (fr 99% in Q1) on a slightly enlarged taxi fleet and the outlook for coming quarters appears positive based on CDG’s comments that they now have a waiting list from drivers for their taxis, a situation which we recall has not been observed since Sg’s taxi industry was liberalised in late 2003. Meanwhile, we expect ridership growth on the North East Line (+12% YOY) to remain high. The NEL is in an operating leverage sweet spot as ridership has already passed the breakeven point, but train carriages are not filled to capacity.

• Overseas operations: Australia growth offsets weak UK taxis

In A$ terms, Australia bus revenue grew 22% YOY due to a full quarter of profit from Melbourne. QOQ, profit grew on more routes operated in both Melbourne and Sydney. CDG expects upcoming growth from Australia to stay strong as more services have been secured. CDG’s high-teen Australian margins are buffered from rising cost pressure as contract terms allow for recovery of certain costs. CDG’s acquisition of Swan Taxis in Perth for A$39m, if successful, would boost 2011E net profit by about 1.5%.

• Valuation: Price target based on UBS VCAM

We use DCF and forecast long-term valuation drivers using UBS VCAM.