Fuel price strength dampened earnings, but 2010 earnings to jump on weak WTI price

CD recorded 3Q08 net profit of S$48.3m, down 18.1% YoY, despite a 5.2% YoY increase in turnover. 9M08 net profit of S$155.3m represents 78% of our raised 2008 forecast.

Global bus turnover fell a marginal 1.2% YoY to S$397m, but high fuel prices led to a more severe 36.1% YoY decline in bus operating profit.

• Singapore bus turnover expanded 8.7% YoY to S$156m, due to a 6.1% YoY ridership increase to 2,375k rides/day. But high diesel prices led to operating profit (inclusive of advertisement and rental income) falling 32% YoY to S$5.9m.

• UK Metroline recorded a 13% YoY turnover contraction due to the weaker Sterling Pound. The 64% YoY plunge in operating profit to S$8.5m was due to higher fuel costs and the benefit of a write-back of pension provision in 3Q07.

• Australia bus turnover grew 11.7% YoY to S$54.4m due to indexation of contract revenues, higher mileages operated and more charter work but was partly offset by the weaker Australian Dollar. Its operating profit of S$8.8m is up 3.5% YoY.

Mild growth for global taxi operations. Global taxi turnover was up 2.7% YoY to S$238m, though operating profit fell 16% YoY.

• Singapore taxi operating profit fell 29% YoY due to higher provision for accident insurance claims and higher diesel subsidies paid to taxi drivers.

• China taxi turnover rose 13% YoY to S$28.6m due to higher rentals on the newer fleet in Beijing and increases in fleets in Chengdu, Jilin and Nanning.

2010 earnings could jump on the back of lower fuel costs. High WTI crude oil price in 3Q08 contributed to the weakness in CD earnings. However, WTI prices has since fallen from Aug 08 monthly average of US$116.70/barrel to 1H Nov 08 average of US$61.70. This is positive for CD earnings going ahead. However, as CD has already partially hedged its fuel price till Jun 09, the expense reduction will be muted until 2H09. We are assuming WTI crude oil price of US$70/barrel for 2009 and US$63/barrel for 2010. However, given the price hedge, the effective price for CD is estimated at US$88/barrel for 2009 and US$63/barrel for 2010. We see this contributing to a S$75m YoY fall in energy and fuel costs for 2010, which is 22% of our forecast 2009 PBT.

Earnings forecasts have been adjusted. We raise our 2008 net profit forecast by 4% to reflect the recent declines in WTI crude oil price. Our 2009 net profit forecast remains unchanged.

Maintain BUY on CD. Our S$1.63 target price is derived from sum-of-the-parts valuation. CD also offers an attractive 2009 dividend yield of 7%. We believe further falls in WTI prices will be the catalyst for investors to relook at investing in CD.

A more scenic ride from hereon

Story: After a steep drop in 2Q, ComfortDelGro’s 3Q results, while falling 18% y-o-y, were within our expectations. Net profit ended at S$48.3m on a turnover of S$803.5m. Excluding the S$26.5m exceptional gain recognized in 2Q08, 9M08 recurring net profit was down c.25% y-o-y. YTD net profit of S$155.3m now forms 75% of our full year estimates.

Point: Turnover from Singapore ops (+16% yoy) was driven largely by higher ridership for its bus and rail, and taxis operations. Overseas turnover dipped 7%, largely due to a weaker GBP, AUD and fewer taxi trips from corporate accounts. The expected net profit fall in 3Q was largely a result of high crude oil price which registered an average of c.US$118/bbl, offset by lower depreciation, leasing charges and other operating expenses.

Cashflow remained healthy, with the Group generating a net operating cashflow of S$141.9m.

Relevance: We believe negatives – high crude oil price, weaker GBP, AUD – have been priced in. Going forward, with crude oil price more than halved from July’s peak, and at under US$60/bbl now, we can expect to see improvements in margins for CDG. We have assumed an average crude oil price of US$100/bbl for FY08 and US$80/bbl for FY09. Except for an impact from a weaker UK taxi business, we expect the Group’s turnover to remain relatively firm.

Maintain Buy, TP: S$1.59. Our DCF valuation is S$1.83 (WACC 10%, terminal growth 1%), equating to 21x on FY08F EPS. But, this is at the higher range of its historical trading band and with the focus on near term earnings we pegged our TP to its historical mid-point average PE of c.15x instead. With its strong balance sheet, healthy operating cashflow and net cash position, we believe it is in an enviable position to acquire assets during testing current times.

ComfortDelGro’s Q3 income dips 18.1% to $48.3m

Group says fundamentals remain sound

HIGH energy costs and diesel subsidies to taxi hirers, as well as a weaker British pound, put the brakes on Comforters Corp’s third-quarter net profit, dragging it down 18.1 per cent to $48.3 million from a year ago.

But revenue for the three months to Sept 30 rose 5.2 per cent to $811.5 million on organic growth in Singapore, China, Australia and Vietnam.

Q3’s earnings per share dropped 18.3 per cent to 2.32 cents from 2.84 cents.

The land transport giant reported growth in bus and rail readership, taxi hired-out rates, vehicle inspections and driving school enrolment but the translation effect of the weaker currencies of the UK and Australia weighed down these positive factors.

Q3 operating expenses rose 8.2 per cent to $733.6 million due mainly to increases in fuel and electricity costs, purchases of diesel for resale, provision of accident insurance claims, payment for credit and Nets card transactions, and diesel subsidies. Fuel and electricity costs, for example, jumped 37.8 per cent to $78.7 million, while materials and consumables (diesel purchases) soared 48.6 per cent to $90.2 million.

These were mitigated by lower vehicle leasing charges, lower repair and maintenance, and the writeback of pension provisions.

ComfortDelGro said Q3’s overseas turnover accounted for 42.2 per cent of total group turnover, down from nearly 48 per cent a year ago, with the long-stated goal to derive half of group revenue from abroad facing a speed hump in the form of a depreciating British pound.

Otherwise, the group said Q3’s group operating profit was 50 per cent higher compared with Q2 due to improvements across all businesses.

‘Our group remains fundamentally sound,’ said Kua Hong Pak, ComfortDelGro managing director and group CEO. ‘We have grown all our businesses in the first nine months of this year despite very challenging financial and economic conditions.’

Turnover for the group’s bus business slipped 1.2 per cent to $396.8 million on the weaker pound. But operating profit of $26.4 million was 36 per cent lower from a year ago because of higher fuel costs. UK bus operations accounted for over 70 per cent of overseas bus turnover, which itself was 58.9 per cent of total group bus turnover. In Singapore, SBS Transit’s turnover grew 8.7 per cent on increases in bus ridership and rental income. But operating profit was 32 per cent lower from a year ago because of higher fuel costs.

The taxi business saw turnover inch up 2.7 per cent in Q3 to $238.2 million. Turnover from Singapore jumped 10.5 per cent to $157.6 million on the back of more cashless transactions and a larger fleet. But overseas taxi operations’ turnover fell 9.7 per cent due mainly to a 19.6 per cent decline in UK turnover, although this was offset by higher turnover from China and Vietnam. Overall, total operating profit dipped 15.6 per cent to $28.6 million.

Turnover from the North-east MRT Line and two LRTs soared 19.7 per cent to $28.5 million as ridership grew steadily, boosting the rail’s operating profit 73.9 per cent to $4 million.

For the first nine months ended Sept 30, 2008, net profit was down 10.2 per cent to $155.3 million, while revenue was 5.6 per cent higher at $2.36 billion.

The year-to-date earnings per share was 7.45 cents – 10.6 per cent lower than the 8.33 cents previously.

ComfortDelGro, which traditionally has low gearing, has short-term bank loans of $70.1 million – down from the $72.6 million at the end of the last financial year. Its total current liabilities of $790.4 million fell from $807.5 million nine months ago.

Core business remained strong

• Within expectations. 3Q08 core net profit of S$48.3m (-18.1% yoy) was within our estimate but ahead of consensus. 9M08 core net profit constitutes 76% and 80% of the respective FY08 estimates. Pretax margins slipped to 9.4% from 12.2% in 3Q07, but improved from 6.5% in 2Q08. Revenue growth of 5.6% yoy to S$804m was in line, driven by all segments though dented by the translation impact of A$ and ₤ revenue. Overseas operations made up 42% of revenue in 3Q08.

• Reprieve from lower energy costs. Fuel and electricity costs rose by 38% to S$78.7m while materials & consumables rose 49% to S$90.2m. On diesel sales, a much lower operating loss of S$0.2m was incurred vs. S$11.3m in 2Q08 and S$6.3m in 1Q08. We expect these energy-related segments to perform better with retreating global energy prices.

• Operational review. Bus revenue dipped 1.2% yoy to S$396.8m in 3Q08, due to the translation impact of a strong A$ and ₤ against S$. China and Singapore growth was led by higher ridership. Taxi revenue rose 2.7% yoy to S$238.2m, on increased cashless transactions in Singapore, strong China and Vietnam contributions and a larger overall fleet. Rail was up 25% yoy to S$28.5m on increased ridership; its operating profit rose 74% yoy to S$4m.

• Outlook. The group is expected to maintain its performance, supported by ridership growth and steady vehicle inspection and automotive engineering businesses in Singapore, and continued growth in its China bus and taxi operations. However, management is cautious in view of volatile forex rates which have an adverse impact and weakness in the car leasing segment during this recession.

• Forecasts adjusted; maintain Outperform. We adjust our FY08-10 forecasts by – 1.7% to +5.1% to reflect retreating energy prices, higher ridership and forex translation costs. We have also raised our WACC assumption to 11% from 9.3%, to factor in higher earnings risks due to volatile forex. Our new DCF-based target price falls to S$1.97 from S$2.28. Maintain Outperform on the back of an attractive dividend yield of 6.9%.