Category: ComfortDelgro
Land Transport – OCBC
Performing well as expected
- Fare hike from Apr-15 onwards
- Positive on several catalysts
- Maintain OVERWEIGHT
Review of CY14 results
The two public transport operators (PTOs) in Singapore, ComfortDelGro (CDG) and SMRT Corp (SMRT) had a smooth end to CY14, as results came in within expectations. CDG’s FY14 revenue rose 8.1% while PATMI grew 7.7%. Its PATMI formed 98.5% of our projection as it continued to achieve broad-based revenue growth across bus, rail and taxi segments. Business stability remains as CDG’s key characteristic but we note that there are other growth drivers going forward as well. For SMRT, recovery momentum continues on as 3QFY15 PATMI jumped 58.4% YoY as revenue rose 6.8% on both non-fare and fare businesses recorded broad-based growth. Its operating margins also improved YoY for the fourth consecutive quarters as 9MFY15 PATMI formed 76.5% of our projection. Similarly, we think SMRT has much more room to grow in view of the several catalysts we have identified.
Outlook remains positive on several catalysts
Going forward, we have reasons to believe that the sector outlook remains largely positive on several catalysts. On near-term catalysts, we expect: 1) further growth for CDG’s taxi segment as it is the only taxi operator in Singapore allowed to grow its fleet size by 2.0% in CY15, 2) higher taxi rental income for both PTOs in CY15 as they continue to renew their taxi fleet, 3) full rental income contribution from SMRT’s Kallang Wave Mall from FY16 onwards, and lastly, 4) savings from lower energy costs that will be more visible from FY16 for both PTOs with different hedging exposures. The longer-term catalysts are still the same from our last sector report: 5) with a little more than a year before the new bus government contracting model (GCM) commences, LTA has to take over all the bus assets from the PTOs and we believe both PTOs have much to gain if LTA pays in lump sum to purchase the bus assets, 6) the transition to the new GCM by 2HCY16 will see core bus operations of both PTOs turn profitable, and 7) the announcement of concrete details on new rail financing model, that has limited impact on CDG but large positive impact on SMRT.
Maintain OVERWEIGHT
Overall, the expected increase in ridership in addition to the catalysts stated above will continue to drive growth. We believe PTOs will also continue to manage costs and improve productivity gains, improving profitability further. Hence, we maintain OVERWEIGHT on land transport sector. However, given the recent runup in CDG’s share price, our top pick for the land transport sector is now SMRT as we reiterate BUY on SMRT [FV: S$1.85] while we maintain HOLD [FV: S$3.07] on CDG. However, note that we have also taken into account the potential fines and higher expenses resulting from the series of train disruptions on SMRT services thus far in CY15.
Land Transport – OCBC
Performing well as expected
- Fare hike from Apr-15 onwards
- Positive on several catalysts
- Maintain OVERWEIGHT
Review of CY14 results
The two public transport operators (PTOs) in Singapore, ComfortDelGro (CDG) and SMRT Corp (SMRT) had a smooth end to CY14, as results came in within expectations. CDG’s FY14 revenue rose 8.1% while PATMI grew 7.7%. Its PATMI formed 98.5% of our projection as it continued to achieve broad-based revenue growth across bus, rail and taxi segments. Business stability remains as CDG’s key characteristic but we note that there are other growth drivers going forward as well. For SMRT, recovery momentum continues on as 3QFY15 PATMI jumped 58.4% YoY as revenue rose 6.8% on both non-fare and fare businesses recorded broad-based growth. Its operating margins also improved YoY for the fourth consecutive quarters as 9MFY15 PATMI formed 76.5% of our projection. Similarly, we think SMRT has much more room to grow in view of the several catalysts we have identified.
Outlook remains positive on several catalysts
Going forward, we have reasons to believe that the sector outlook remains largely positive on several catalysts. On near-term catalysts, we expect: 1) further growth for CDG’s taxi segment as it is the only taxi operator in Singapore allowed to grow its fleet size by 2.0% in CY15, 2) higher taxi rental income for both PTOs in CY15 as they continue to renew their taxi fleet, 3) full rental income contribution from SMRT’s Kallang Wave Mall from FY16 onwards, and lastly, 4) savings from lower energy costs that will be more visible from FY16 for both PTOs with different hedging exposures. The longer-term catalysts are still the same from our last sector report: 5) with a little more than a year before the new bus government contracting model (GCM) commences, LTA has to take over all the bus assets from the PTOs and we believe both PTOs have much to gain if LTA pays in lump sum to purchase the bus assets, 6) the transition to the new GCM by 2HCY16 will see core bus operations of both PTOs turn profitable, and 7) the announcement of concrete details on new rail financing model, that has limited impact on CDG but large positive impact on SMRT.
Maintain OVERWEIGHT
Overall, the expected increase in ridership in addition to the catalysts stated above will continue to drive growth. We believe PTOs will also continue to manage costs and improve productivity gains, improving profitability further. Hence, we maintain OVERWEIGHT on land transport sector. However, given the recent runup in CDG’s share price, our top pick for the land transport sector is now SMRT as we reiterate BUY on SMRT [FV: S$1.85] while we maintain HOLD [FV: S$3.07] on CDG. However, note that we have also taken into account the potential fines and higher expenses resulting from the series of train disruptions on SMRT services thus far in CY15.
ComfortDelgro – OCBC
DTL 2 to open ahead of schedule
- Delay in DTL 2 shortened by a few months
- DTL project likely to breakeven earlier
- Maintain BUY
Good news on DTL 2’s schedule
Singapore Transport Minister Lui Tuck Yew announced on 29-Sep that the Downtown Line 2 (DTL 2) mass rapid transit (MRT) line will be opened in 1Q16, a few months ahead of schedule. The original schedule was delayed from end-2015 to mid-2016 after one of its main contractors, Alpine Bau, went into insolvency last year. He added that additional manpower as well as innovative work processes helped accelerate the project and all the contractors will continue to do so in a bid to try to bring forward the opening to even earlier than 1Q16.
Expect DTL project to breakeven earlier
As at 2QFY14, CDG recorded loss of S$6.2m from its Downtown Line 1 (DTL 1) operations but we estimate CDG to breakeven on its start-up costs in the period between phase 2 and phase 3 of the whole DTL project. With the opening of DTL 2 brought forward by a few months and possibly even earlier, we believe this is good for CDG as this would also logically allow it to breakeven earlier as well. Beyond its breakeven point, we expect CDG to be able to cover the licensing fee charged by LTA through revenue generated from DTL and hence see meaningful income contribution. Furthermore, we believe ridership will improve significantly given that the DTL 2 comprises 12 stations and one depot, including four interchange stations, where we expect traffic flow to increase considerably. We also believe the advertisement and rental business segments, which offer higher margins, to further boost revenue and profitability.
Maintain BUY
With the impact of DTL already factored in our financial model previously, we retain our forecasts since the opening of DTL 2 continues to be in FY16. Although the estimated total licensing fee of ~S$1.6b over the 19-year operating lease should have started in 2013 when DTL 1 commenced, we expect to see significant increase only upon opening of the full DTL in 2017 since the
variable component of the fee depends on ridership. With the slight retreat in share price since our last update in Aug-14, we maintain BUY with an unchanged fair value estimate of S$2.92.
ComfortDelgro – DBSV
Right on schedule
- 2Q14 in line; 1H forms 49.5% of our FY14F estimates, DPS of 3.75 Scts declared
- Expect stable growth to continue, aided by recent fare increases, ridership and acquisitions
- Share price trading at 1.5 std deviation above historical average
- Maintain HOLD, TP revised marginally to S$2.71
Highlights
2Q14 within expectations. 2Q14 net profit of S$75.7m was 9.9% up from a year ago, as revenue grew by 11.9% y-o-y to S$1.02bn, contributed by all business segments, notably buses (+S$80.3m) and taxis (+S$20m). Operating profit rose by 6.5% y-o-y to S$119.9m, a tad slower than topline due to higher operating expenses (+12.6% y-o-y) arising largely from higher staff costs (+17.3%), fuel & electricity (+25.6%) and premises costs (+26.9%). Operating margins slipped slightly to 11.8%, from 12.4% a year ago. An interim dividend of 3.75 Scts was declared (1H13: 3 Scts), equating to 57.6% payout ratio.
Our View
Stable growth to continue, though y-o-y rate in 2H could be a tad lower. Despite continued cost challenges, we expect management to continue delivering stable growth into 2H14 and FY15/16F, helped by recent fare increases and higher ridership in Singapore, and both organic and inorganic growth overseas. However, we currently expect 2H14 to see a slower y-o-y growth rate compared to that seen in 1H14 (+9.8%), due to a higher base in 2H13 (post-Metroline West acquisition in mid-2013) and lower contribution from Australia due to Sydney Metropolitan Bus Region 4 re-contract in August.
Acquisitions to continue; Blue Mountains Bus soon in the bag. CD recently announced that it had entered into an agreement to acquire Sydney-based Blue Mountain Bus Company for A$26.5m (S$30.8m), subject to regulatory approvals and due diligence. We were not surprised by this bite-sized purchase and view it positively as it will supplement the Group’s overall growth. We expect management to continue on this track to leverage on its strong balance sheet.
Recommendation
Maintain HOLD, TP S$2.71. We like CD for its diverse business and geographical exposure, and steady growth profile coupled with its opportunistic bite-sized acquisitions in areas which are familiar to management. However, we maintain our HOLD recommendation, given limited upside and with its valuation at 19x FY15F PE, which is c.1.5 std deviation above its historical mean. Our forecast is tweaked up marginally by 1.3% on lower minority interests, resulting in a revised TP of S$2.71. We will turn into buyers at c.S$2.40, which implies >10% upside to our TP.
ComfortDelgro – DBSV
Right on schedule
- 2Q14 in line; 1H forms 49.5% of our FY14F estimates, DPS of 3.75 Scts declared
- Expect stable growth to continue, aided by recent fare increases, ridership and acquisitions
- Share price trading at 1.5 std deviation above historical average
- Maintain HOLD, TP revised marginally to S$2.71
Highlights
2Q14 within expectations. 2Q14 net profit of S$75.7m was 9.9% up from a year ago, as revenue grew by 11.9% y-o-y to S$1.02bn, contributed by all business segments, notably buses (+S$80.3m) and taxis (+S$20m). Operating profit rose by 6.5% y-o-y to S$119.9m, a tad slower than topline due to higher operating expenses (+12.6% y-o-y) arising largely from higher staff costs (+17.3%), fuel & electricity (+25.6%) and premises costs (+26.9%). Operating margins slipped slightly to 11.8%, from 12.4% a year ago. An interim dividend of 3.75 Scts was declared (1H13: 3 Scts), equating to 57.6% payout ratio.
Our View
Stable growth to continue, though y-o-y rate in 2H could be a tad lower. Despite continued cost challenges, we expect management to continue delivering stable growth into 2H14 and FY15/16F, helped by recent fare increases and higher ridership in Singapore, and both organic and inorganic growth overseas. However, we currently expect 2H14 to see a slower y-o-y growth rate compared to that seen in 1H14 (+9.8%), due to a higher base in 2H13 (post-Metroline West acquisition in mid-2013) and lower contribution from Australia due to Sydney Metropolitan Bus Region 4 re-contract in August.
Acquisitions to continue; Blue Mountains Bus soon in the bag. CD recently announced that it had entered into an agreement to acquire Sydney-based Blue Mountain Bus Company for A$26.5m (S$30.8m), subject to regulatory approvals and due diligence. We were not surprised by this bite-sized purchase and view it positively as it will supplement the Group’s overall growth. We expect management to continue on this track to leverage on its strong balance sheet.
Recommendation
Maintain HOLD, TP S$2.71. We like CD for its diverse business and geographical exposure, and steady growth profile coupled with its opportunistic bite-sized acquisitions in areas which are familiar to management. However, we maintain our HOLD recommendation, given limited upside and with its valuation at 19x FY15F PE, which is c.1.5 std deviation above its historical mean. Our forecast is tweaked up marginally by 1.3% on lower minority interests, resulting in a revised TP of S$2.71. We will turn into buyers at c.S$2.40, which implies >10% upside to our TP.