Fuelled by fuel

• Strong operating profit performance (S$94.5m, +82% yoy) in 2Q on lower operating expenses
• Revenue dipped -4% yoy to S$758m; flat if excluding negative translation of GBP/AUD
• Expect strong growth momentum to continue into 3Q
• Maintain Buy, TP raised to S$1.83 equating to 17% upside.

A strong quarter – within expectations. As expected, operating profit registered a strong growth of 82% yoy to S$94.5m, from S$52m, on lower operating costs, largely fuel and electricity costs. This is despite revenue falling 4% to S$758.3m on lower fares and ridership in Singapore, coupled with a weaker GBP and AUD against 2Q08. The negative translation impact of GBP and AUD was S$34.2m; revenue would have been flat excluding that impact. Excluding the exceptional gain in 2Q08 (S$26.5m), net profit would register a growth of 89% to S$57.3m. An interim dividend of 2.63Scents has been declared

Expect to see continued growth in 3Q. We should also continue to see good yoy growth continuing into 3Q09, albeit at a slower rate, on lower operating expenses, particularly fuel costs. The strengthening of GBP and AUD by 14% and 20% since Jan 09 should also bode well for the Group on a sequential basis.

Maintain Buy, TP raised to S$1.83. We raised our forecasts by 2.7% in FY09F and 9.1% in FY10F as we adjust our exchange rate assumptions, coupled with lower operating expenses. We continue to like ComfortDelGro for its diversified geographical presence and its ability to deliver stable growth in these testing times. We raised our TP to S$1.83 as we peg it to a blend of PE and DCF basis (see pg 4, table 2). This equates to an implied PE of 16.8x, 1.7x P/B and EV/EBITDA of 5.7x on our FY10F forecasts, which we believe is not excessive.

Lower energy costs boosted margins

2Q09 results in-line with expectations. ComfortDelGro registered 2Q09 PATMI of SGD57.3m, up 0.9% YoY (+9.1% QoQ). 1H09 PATMI of S$109.8m was 49.3% of our full year forecast of S$222.8m (consensus S$219.4m). Revenue fell by 4.0% YoY to S$758.3m due to the negative translation effect of the weaker £ and A$. Excluding the translation effect, revenue would have risen by 0.3% to S$792.5m. Operating profit surged 81.7% YoY to S$94.5m due largely to a sharp fall in operating expenses led chiefly by a drop in fuel and electricity costs. Maintain BUY with a DCF-derived target price of S$1.78, based on a 6.9% WACC and 3% terminal growth rate.

Lower energy costs boosted bus earnings. Revenue from the group’s bus operations fell by 3.9% as growth from operations in Australia and China was offset by declines in Singapore and the UK. The temporary fare reduction, increase in transfer rebate and decline in bus ridership (-2.1%) led to a 7.3% decline in Singapore bus revenue. This was, however, offset by lower fuel prices which led to the surge in EBIT from S$3.1m in 2Q08 to S$10.7m.

Weak rail ridership seen in Jan-Jun. In 1H09, ComfortDelGro daily Singapore rail ridership rose 6.6% YoY to 0.36m, slower than 2008’s growth of 15.4%. We are, however, upbeat that ridership figures could be stronger next year on the back of stronger economic and tourism growth. We expect NEL to see stronger ridership when RWS opens its doors in 1Q10.

Underperformed broader market despite healthy earnings. Since March, ComfortDelGro’s stock price rose 22% vis-à-vis the STI’s 76%. We believe the underperformance is unjustifiable given its stable earnings growth. An interim dividend of 2.63¢ was declared, representing a payout ratio of 50%. ComfortDelGro currently trades at 14.6x FY10 P/E multiple which is at the mid range of its 13-17x trading band. At our target price of S$1.78, ComfortDelGro will trade at an FY10 P/E multiple of 16.5x. We, however, prefer SMRT as it remains a key beneficiary to Singapore’s land transport structural growth story.

Weak sterling and bus ridership

• In line. 2Q09 net profit of S$57.3m (+0.9% yoy) was in line with consensus and our annualised estimates, with 1H09 net profit forming 49-50% of the respective FY09 estimates. Revenue slipped 4.0% yoy to S$758.3m, mainly due to a negative translation effect of S$34.2m from a weak £. Operating costs of S$593.7m fell 11.8% yoy with declines in almost all items except depreciation and repairs and maintenance. 2Q09 pretax margin of 11.9% was better than 2Q08’s 9.8% on lower fuel and energy prices and excellent cost control. Overseas operations contributed 44.3% of revenue, up from 43.8% a year ago. Interim dividend was 2.63 Scts.

• Operational review. Revenue growth was broad-based, with increases coming from the bus business in Australia, China and the UK, taxi and bus station operations in China as well as taxi, vehicle inspection and testing, rail, automotive engineering and driving centre businesses in Singapore. Bus revenue dipped 3.9% yoy to S$380.4m, due to temporary fare reductions and higher transfer rebates in Singapore, lower ridership and the translation effect of a weak ₤ against the S$. However, growth came from rail (+2.5% yoy), bus stations (+13% yoy), automotive engineering (+27.5%) and vehicle inspection (+7.2%). Taxi and diesel sales dropped 2.8% yoy and 26.6% yoy respectively, the latter due to lower fuel prices and sales volumes. EBIT margins improved to 12.5% from 6.3% in 2Q08 on lower overall costs.

• Outlook. Management guided that its performance should be maintained, although Singapore bus operations are expected to be weaker on fare reductions and higher transfer rebates. However, the weaker £ could be a drag on its sizeable UK operations. Management remains cautious in view of the fragile economic climate and would maintain its tight control on costs, receivables and cash flows.

• Maintain Neutral. We maintain our FY09-11 forecasts. With more stable currencies, we have reduced our DCF valuation discount to 10% from 25% (to account for forex risks). We arrive at a new target price of S$1.64 (from S$1.37, WACC 11.2%). CY09 prospective yield is 3.7%.