ComfortDelGro Q1 net up 4.6%

Bus business revenue slips 8.6% on foreign currency translation effect

COMFORTDELGRO’S net profit for the first quarter ended March 31, 2009, rose 4.6 per cent to $52.5 million, due largely to lower operating expenses incurred.

But Q1 revenue slipped 4.4 per cent to $716.6 million due to the negative translation effect of the weaker British pound and Australian dollar. The land transport giant said that although revenue growth was broadbased, both in geographical and segmental terms, this was offset by the adverse foreign currency translation effect.

It added that if not for this effect, revenue would have risen by 2.3 per cent to $766.7 million.

First-quarter operating profit increased by 7.0 per cent to $81.5 million as operating expenses decreased. The latter had dropped 5.7 per cent to $635.1 million mainly because of the lower cost of diesel purchased for resale to the group’s taxi drivers, as well as a reduction in fuel and electricity costs.

Staff costs were also lower, thanks to the government’s Jobs Credit scheme which subsidises wage bill for local workers.

Earnings per share was 2.52 cents per share, up from 2.41 cents in the previous corresponding quarter. No dividend has been recommended.

‘The global economic outlook is still very uncertain and the possibility of a global flu pandemic breaking out remains,’ said ComfortDelGro managing director and group CEO Kua Hong Pak. ‘Given the difficult operating environment, we have performed satisfactorily during the quarter.’

The group’s bus business saw Q1 revenue decline 8.6 per cent to $347.9 million mainly on a $32.3 million drop from the UK bus business because of the adverse forex impact.

In Singapore, revenue dipped 0.4 per cent to $142.2 million as the average daily bus ridership fell marginally by 0.3 per cent to 2.28 million. Including advertising and rental revenue, total bus revenue at listed unit SBS Transit came up to $149.1 million compared with $149.7 million a year ago. Revenue is expected to fall further due to the fare reduction exercise which came into effect on April 1, 2009, and the increase in the transfer rebate.

Revenue from the group’s overseas bus operations continued to exceed those of its Singapore operations, accounting for $192.6 million or 55.0 per cent of total group bus revenue of $347.9 million.

Taxi business saw a 2.3 per cent decrease in Q1 revenue to $225.4 million. But in Singapore, taxi revenue was 5.8 per cent higher at $152.1 million due to a larger operating fleet and an increase in cashless transactions.

Revenue for the rail business continued to grow strongly, surging 10.5 per cent to $27.4 million.

Earnings prospect remain bright

The weakness in crude oil prices is a positive for ComfortDelgro’s operating margin. Crude oil prices has trended below US$50/bbl in 1Q09, sharply lower than the high of US$134/bbl in Jun 08. This will lower operating costs and widen ComfortDelgro’s operating margins.

Singapore rail ridership seen to do well. Whilst Singapore bus ridership was flat YoY for the first two months of 2009, rail ridership rose 8.4%. We have conservatively assumed flat 2009 bus ridership and a respectable 7.4% rail ridership growth. Management indicated that its Singapore fleet of 15 thousand taxis has a low idle rate of 1%. For the 300 odd taxis mothballed in the LTA yard (which will be exempt from special diesel taxes), none of them are ComfortDelgro taxis.

Looking for more acquisitions in Australia. Australia accounted for 7% turnover share in 2008. The Australian cost-plus model is commercially attractive – increases in costs eg fuel and labour can be passed on to the government with a short one-month lag. This adds more certainty to margins. Growth in Australia is likely to come from acquisitions. ComfortDelgro will consider further acquisitions if the IRR is at least 7%.

Scope to expand in China. China accounted for 8% turnover share in 2008. ComfortDelgro currently operates in 12 Chinese cities, with Beijing taxi operations accounting for a sizeable 48% revenue share. ComfortDelgro runs 5.1 thousand taxis in Beijing. There is scope to expand the taxi operations in China via acquisitions of more taxi licences. ComfortDelgro sees China as
attractive given its operating margins of 20%+ and ROA of 8-9%.

Our S$1.78 target price is derived from sum-of-the-parts valuation. Share price catalysts include our forecast 32% recurring net profit increase for FY09, and an attractive FY09 dividend yield of 4.5% (based on a 55% payout ratio).