Stable yoy growth continuing from 2Q

At a Glance

• 3Q09 net profit + 15% yoy; within expectations
• Revenue impacted by FX translation but operating profit grew 17% yoy largely on lower oil prices;
• Steady group operations with diversification helping to balance soft spots (UK taxi, Singapore bus)
• Retain Buy; TP: S$1.83.

Comment on Results

3Q09 net profit within expectations. 3Q09 net profit at S$55.6m (+15.1% yoy, -3% qoq) on the back of a topline of S$782.6m (-3.7% yoy). The drop in revenue was largely a result of negative FX translation effect (-$24.4m) and lower diesel sales. 9M net profit now accounts for c.76% of our full year estimates.

Operating margins improved on lower costs. 3Q EBIT margins improved to 11.6%, from 9.7% a year ago, largely on lower oil prices, lower payment for contract services and Jobs Credit, offset partially by higher staff costs, and other depreciation.

Balance sheet remains strong with a net gearing of 3.4%, from net cash position in Dec 08, due to payment for the acquisition of Kefford in Victoria, Australia.

Recommendation

DTL bid likely in mid 2010. While details are not firmed up and discussions are still at a preliminary stage with the Land Transport Authority, management believes the bidding for Downtown Line (DTL) could be sometime around mid 2010.

Hedged partially on fuel needs till 1Q10. Management indicated that they have hedged c.50% of their fuel needs till 1Q10, and are looking to hedge further into 2010.

Maintain Buy, TP: S$1.83. We continue to like ComfortDelGro for its diversified geographical representation. We see steady growth for the Group going forward, with challenges in certain areas (eg buses in Singapore, taxis in UK) balanced by potential growth in other areas (rail, taxis in China, buses in Australia). The strengthening of AUD is positive for its growing presence there. Maintain Buy, TP: S$1.83 based on a blend of 15x PE and DCF (WACC 9.5%).

ComfortDelGro’s Q3 profit up 15%

LOWER energy costs helped ComfortDelGro to post a 15.1 per cent rise in net profit to $55.6 million for the third quarter ended Sept 30, 2009.

But Q3 revenue for the world’s second largest land transport group slipped 3.7 per cent to $782.6 million, mostly because of the negative translation effect of the weaker British pound and Australian dollar.

Third-quarter operating profit had climbed 16.7 per cent to $90.9 million, due mainly to lower operating expenses as a result of a drop in fuel and electricity costs. The transport giant said that without the negative foreign currency translation effect, operating profit would have been 20 per cent higher at $93.4 million.

Q3 overseas operating profit accounted for 44 per cent of total group operating profit, from 49 per cent in the same quarter a year ago. Particularly outstanding was the overseas bus business, which continued to outpace the local operations, accounting for 78.2 per cent of group bus operating profit of $31.7 million.

Overseas operations accounted for 44.5 per cent of group revenue for Q3, up from 42.5 per cent previously.

The group said that its key businesses grew. Revenue growth was broad- based in both geographical and segmental terms.

But overall revenue was slowed down by lower diesel sales to taxi drivers, which totalled $49.1 million or $24.4 million less than the $73.5 million in the previous corresponding quarter as selling prices and volumes sold fell. The lower cost of diesel, however, resulted in a Q3 operating profit of $6.2 million compared with a loss of $0.2 million previously.

The group’s taxi business posted Q3 operating profit of $27.7 million, or $0.9 million lower than last year’s Q3, due to lower profit from the UK and Vietnam taxi businesses, although this was compensated by higher profit from the Singapore taxi business.

The local taxi business had recorded a Q3 operating profit of $16.3 million, or $1.1 million better than previously. This was on the back of a $3.1 million increase in revenue to $159.4 million, thanks to a higher volume of cashless transactions and a higher operating fleet.

Q3 earnings per share came to 2.66 cents, up from 2.32 cents previously. Net asset value per share totalled 78.9 cents, up from 74.65 cents nine months ago. No dividend has been recommended.

For the first three quarters, net profit was 6.5 per cent higher at $165.4 million compared with the same period a year ago. But year-to-date revenue was 4 per cent lower at $2.26 billion, although earnings per share came to 7.92 cents, up from 7.45 cents previously.

ComfortDelGro managing director and group CEO Kua Hong Pak said that the first nine months of 2009 were not easy but the company stayed focused and built on its strengths.

However, Mr Kua added: ‘The economic outlook remains uncertain despite signs of recovery, so we will have to continue to be vigilant.’

Growth opportunities support long-term prospects

• We initiate coverage of ComfortDelGro (CD) with a BUY rating. CD is trading at the lower-end of its PE band of 13x-18x. Our fair value of S$1.96/share is 17.3x FY10 PE, which offers a share price upside of 22%. Despite earnings volatility from forex moves (we factored in a 4% discount in deriving FV), we feel the potential of its overseas operations outweigh the volatility. Overseas contributions made up 42% of revenue and 39% of operating profit in 1H 2009.

• CD has established a strong foothold in the transport sector in its key markets of Britain, Australia and China. We expect CD’s good delivery of bus services in Britain and Australia to garner more of such contracts from the respective governments – while margins are protected to a large extent by pass-through clauses. These account for a combined 27% of group revenues and 23% of operating profit in 1H 2009.

• With its toehold in taxi operations across 11 cities in China, CD has yet to tap the full potential of the vast market in China. Continued acquisitions of taxi licences and vehicles – adding to its current fleet of 9,700 – will boost contributions from this segment. CD’s taxis in China contributed 12% to group operating profit – on margins of 31% – in 1H 2009.

• The train segment will be the spark for operations in Singapore. CD’s North-East line continues to enjoy stronger
ridership growth as it is less mature than SMRT’s older lines. Incremental ridership also flows through to the
bottomline as passenger load is below estimated 80% during peak times. CD is also a strong contender for the upcoming 40km Downtown Line – expected to be awarded end-2009 or 1H 2010. Taxi and bus earnings recovers in
FY09 from lower cost of diesel.

• A strong balance sheet with net gearing at a low 7% at 1H 2009 supports continued expansion overseas. But CD is adopting a conserve-cash approach this year amid the economic uncertainty, while maintaining dividend policy at 50% of net profits. This translates to a yield of 3%-4% p.a. Unless, opportunistic M&As come along, CD is likely to return extra cash to shareholders.

• On a negative note, after a sharp recovery in FY09 as a beneficiary of lower oil prices, our net profit forecast of 3%-4% p.a. for FY10-11 leaves little buffer from adverse currency rates. We estimate that a 5% appreciation in the S$ against the Pound Sterling, A$ and RMB, translates to a 2% reduction in earnings in each forecast year. In addition, about 15% of group cost structure is vulnerable to rising oil prices.

Playing The Recovery Theme

Playing the recovery theme. We like ComfortDelGro (CDG) for the two opportunities it offers for playing the recovery theme. The earnings recovery momentum derived from lower fuel expenses is set to continue for the rest of 2009. In 2010, we expect to see improved business conditions on the back of a sturdier global recovery to augment the effect of normalised margins, giving a more meaningful boost to earnings.

2009: Margin recovery on lower energy-related costs. Margins are already on the road to recovery on the back of significantly lower oil prices and the company’s fuel hedging programme that was put in place end-08. In 2Q09, EBIT margin recovered to 12.5% (+5.9ppt yoy), and net margin recovered to 7.6% (+3.8ppt yoy). By our estimation, the bulk of the savings in energy-related costs over 2Q08 flowed directly down to net profit.

2010: Turnover improvements augment effects of normalised margins. CDG is set to enter 2010 on healthier margins primarily from lower fuel cost. In addition, we expect increased corporate spending in the UK to help the company’s taxi business there, and the lifting of the temporary fare reductions and transfer rebates to return SBS Transit back to a normal level of performance.

Maintain BUY; target price raised to S$1.85. We have lowered our profit forecasts for 2009-11F by between -6.3% and -11.3%. We value CDG using discounted free cash flow to equity at S$1.85/share (COE: 6.4%; terminal growth: 2%). Our revised target price (up from S$1.76) gives a potential upside of 15.6% over the last closing price of S$1.60.

ComfortDelGro shares up after good results

SHARES of ComfortDelGro continued to climb in trading yesterday after posting a fairly strong performance for the second quarter ended June 30.

They closed three cents higher at $1.60, having been on an upward trend since July 6 last year when it closed at $1.26.

Both DBS Group Research and Deutsche Bank called a ‘buy’ on the land transport giant with target prices of $1.83 and $1.75 respectively, while JP Morgan maintained an ‘overweight’ with a target price of $2.

‘We should continue to see good year-on-year growth continuing into Q3 2009, albeit at a slower rate, on lower operating expenses, particularly fuel costs. The strengthening of sterling and the Australian dollar by 14 per cent and 20 per cent since January should also bode well for the group on a sequential basis,’ DBS Group Research said.

It also singled out Comfort’s ‘diversified geographical presence’ and its ability to deliver stable growth in the economic downturn as plus points.

Meanwhile, CIMB Research maintained a ‘neutral’ on Comfort with a new target price of $1.64 and Kim Eng called a ‘hold’ on Comfort with a target price of $1.59.

‘The stock has done better than expected in recent months on a rising stock market but at the current share price ($1.57), Comfort is trading at 15x FY09 and 14x FY10 forecast earnings with dividend yield of a mere 3.4 per cent,’ Kim Eng said in a note yesterday.

Net profit for Q2 2009 increased by 0.9 per cent to $57.3 million.

However, there was an exceptional gain of $26.5 million in Q2 2008.

Excluding that exceptional gain, the year-on-year increase in net profit for the second quarter of this year would have been 89 per cent.

Revenue fell by 4 per cent to $758.3 million compared to the same period last year due mainly to the negative translation effect of the weaker pound and Australian dollar.