Category: ComfortDelgro
Transportation – DB
Fare hikes slightly less than expected
Effective fare hike expected to be small; Comfort the stock to own
The net effective fare hike granted was slightly less than our expectation of 1%, but given the defensive characteristics of both SMRT and Comfort we maintain Buy. Comfort in particular offers good value, and if oil prices continue to decline, this could offer upside to our earnings estimates. Ridership growth for both trains and buses remains strong.
Fare hike offered, strategy is clearly to drive up public transport ridership
The Public Transport Council (PTC) has granted an overall net fare adjustment of 0.7% for 2008. This was slightly less than the 1% we expected. The headline percentage fare hikes are more (5.5% in some cases) but the net benefit for Comfort’s bus and train operations is expected to be 0.9% and for SMRT’s operations 0.6%. The difference in headline increase and the effective increase is because the transfer rebate to passengers was increased from 25 cents to 40 cents.
Transfer penalty will be fully removed in 2009
Under the Land Transport Masterplan, distance-based through fares will be introduced in 2009 to make transfers more seamless in the hub-and-spoke public transport system. So in 2009, when the fare hike requests are again reviewed, the net effective fare hikes are likely to be smaller than the headline numbers would indicate.
SMRT has contracted electricity prices; diesel prices unhedged for both
SMRT has contracted its electricity prices through to March 2009. While this should ensure stability in the cost structure, we note that the new contract was about 30% over the earlier one. Both ComfortDelGro and SMRT have no hedges in place for diesel, but indicate that they are reviewing this closely.
Comfort TP S$1.97; SMRT TP S$1.95
For ComfortDelGro our TP of S$1.97 is based on a dividend discount methodology, assuming an explicit three-year growth forecast of 5% and a 3% terminal growth rate. The assumed payout ratio is 80% and cost of equity derived is ~8%. Given that the company continues to make acquisitions and grow overseas, our forecast of 5% growth over the next three years should be easily achievable. We transition growth over three years to a terminal growth rate of 3%. Dividend payout assumption during the stable growth phase is 85%. The downside risks are higher fuel costs, for which the company currently has no hedges, and execution missteps for acquisitions overseas.
Our target price for SMRT of S$1.95 is based on a ROE/PB-growth methodology (ROE/COE), assuming a c.8% discount rate, 6% three-year explicit forecast growth rate and 3% terminal growth rate, and ROE of c.21%. The ROE of 21% is benchmarked against current run rates. This is based on SMRT’s current ROE run rate and an assumption that the company is mostly in a terminal growth rate mode. On the downside, risks include lower-than-expected ridership, softness in the rental business for some stations when lease renewals become due, higher fuel costs, and competition in the taxi business.
ComfortDelgro – DBS
Things Can Only Get Better
Story: Excluding an exceptional gain of S$26.5m, Comfort Delgro’s 2Q08 results were below expectations, due mainly to the high cost of fuel dampening domestic earnings. Core profit in the quarter fell by 48% yoy to S$30.3m on top line growth of 6% yoy to S$785m. At half-time, core earnings fell by 29% yoy to S$80.5m on revenue expansion of 6% to S$1.5bn. An interim dividend of S 2.6cts was declared.
Point: Whilst overseas margin held up quite well at 9.7% at half-time vs 10% a year ago, CD’s domestic bus and diesel sales operations were adversely affected by significantly higher fuel costs, bringing down domestic margins from 12.3% a year ago to 7% as at 1H08. Turnover growth, on the other hand, was driven by higher ridership domestically (+10% yoy), whilst overseas operations only showed a modest growth (+1% yoy). Factoring in lower margins for the Group’s bus operations and diesel sales business, as well as the S$26.5m exceptional gain in 2Q08, we have lowered our earnings forecasts for FY08 and FY09 by 9% and 15% respectively.
Looking ahead, with oil prices having eased off in recent weeks and the potential of a fare hike coming through, we are optimistic that margins over the next few quarters will improve.
Relevance: We maintain our BUY recommendation, as we believe core earnings can show improvement over the next few quarters, with a target price of S$1.90, adjusted to reflect our lower earnings and dividend forecasts. Our target price is still based on a target net yield of 4.5% for FY09, translating to c. 18x FY09 earnings. CD’s balance sheet remains healthy at less than 0.1x net gearing and there remains the potential for further overseas expansion or acquisitions to drive the Group’s long-term growth.
ComfortDelgro – BT
ComfortDelGro Q2 earnings down 2.9%
SBS Transit posts 56% fall in Q2 profit on rise in fuel and electricity costs
A COMBINATION of higher fuel and electricity costs, as well as diesel subsidies to taxi hirers, weighed down ComfortDelGro Corp’s net profit for the second quarter ended June 30, 2008, which slipped 2.9 per cent to $56.8 million.
But Q2 revenue rose 5.8 per cent to $790.1 million on the back of strong growth in bus and rail ridership, mileages operated, and taxi corporate billings.
Overseas turnover accounted for 43.8 per cent of total group turnover, down from 46.7 per cent a year ago mainly because of the weaker pound sterling. ComfortDelGro has extensive bus and taxi businesses in the UK.
‘The operating environment has proven to be difficult with the global economic slowdown, rising inflation and high oil prices,’ said Kua Hong Pak, ComfortDelGro’s managing director and group CEO. ‘This is not expected to ease up soon.’
Operating expenses rose 11.2 per cent to $739.2 million in Q2. Of the $74.2 million increase, fuel and electricity costs accounted for $31.0 million, while purchases of materials and consumables – mainly diesel – accounted for another $33.7 million.
The land transport giant said high energy costs were largely responsible for Q2 operating profit plunging 37.7 per cent to $50.9 million.
But the good news was that overseas operating profit accounted for a record 59.6 per cent of total group operating profit – from 41.0 per cent in Q2 last year.
In particular, the operating profit of the overseas bus businesses made up a whopping 89 per cent of the group’s total bus operating profit.
Earnings per share in the second quarter were 2.72 cents, down from 2.81 cents in the previous corresponding quarter.
For the first half ended June 30, 2008, net profit was down 6.1 per cent to $107.0 million. Interim revenue was 5.8 per cent higher at $1.54 billion.
H1 earnings per share was 5.13 cents, down from 5.48 cents previously. An interim one-tier tax-exempt dividend of 2.6 cents per ordinary share has been declared.
Higher fuel and electricity costs also put the brakes on listed unit SBS Transit’s net profit for the second quarter ended June 30, 2008, causing it to fall 56.0 per cent to $6.39 million.
But Q2 group revenue grew by 8.5 per cent to $180.4 million on increased bus and rail fare revenue, higher advertisement revenue and higher rental income.
Fuel and electricity costs in Q2 had surged 73.7 per cent to $52.4 million compared with the previous corresponding quarter, pushing the bus and rail operator’s total operating expenses up by 16.0 per cent to $173.6 million.
Earnings per share fell to 2.07 cents in Q2 from 4.72 cents in the same quarter last year.
For the first half ended June 30, SBS Transit’s net profit was 31.3 per cent lower at $21.68 million, while interim revenue was 8.5 per cent higher at $357.1 million.
Interim earnings per share slipped to 7.04 cents from 10.31 cents previously. A one-tier tax-exempt interim dividend of three cents per ordinary share has been declared.
ComfortDelgro – CIMB
Overseas growth
• Below. 2Q08 core net profit of S$30.8m (-47.4% yoy) was below consensus and our expectations. 1H08 net profit constitutes 38% and 40% of the respective annualised estimates. The variances were: higher energy and fuel costs, costs of materials and consumables, and diesel subsidies. Pretax margins slipped to 9.9% from 11.1% in 2Q07. Revenue growth of 6.2% yoy to S$785m was in line, driven by all segments. Including an exceptional item of S$26.5m relating to Cabcharge, net profit was flat at S$56.8m. Overseas operations were 44% of revenue in 2Q08. An interim dividend of S$0.026 was declared.
• Plagued by fuel. Fuel and electricity costs rose by S$31m while an operating loss of S$11.3m was incurred on the sale of diesel to taxi hirers in Singapore. For Singapore bus operations under SBST, revenue rose 6.2% yoy to S$141.3m on higher ridership, but there was an operating loss of S$3.1m on account of higher fuel costs compared with a S$9.4m profit a year ago.
• Operational review. Bus revenue rose 3.1% yoy to S$393.5m in 2Q08, driven by overseas operations. Australia revenue was up 30% due to the indexation of contract revenue, additional mileage operated and increased charter work. China and Singapore growth was led by higher ridership. UK Metroline was weaker by 6.6% yoy as a result of a weaker sterling pound against the S$. Taxi revenue rose 3.6% yoy to S$237.2m, on increased corporate billings and higher cashless transactions in Singapore and strong China contributions. UK operations slipped 13.3% yoy to S$57.2m on lower corporate bookings and a weaker pound vs. S$. Rail was up 16% yoy to S$26.8m on increased ridership; its operating profit rose 42% yoy to S$3.7m.
• Forecasts adjusted; maintain Outperform. To reflect higher-than-expected fuel costs for FY08, we have cut our core net profit forecast for FY08 by 19.2%. However, we raise our FY09-10 estimates by 3.7-4.6% to factor in less-volatile fuel costs. Following this, our DCF-based target price rises to S$2.16 from S$2.09, on an unchanged WACC assumption of 9.3% and terminal growth of 2%. Maintain Outperform on the back of an attractive dividend yield of 5.5%.
ComfortDelgro – DMG
Hurt by Energy Costs, But Valuation Attractive
High crude oil prices will mean increased energy and fuel costs for CD. WTI crude oil price has risen from an average of US$72.4/bbl in 2007 to US$111.1/bbl in 1H08, or an increase of 53%. It even exceeded US$140/bbl briefly at some point in Jul 08, before moderating slightly to the US$130 level. We have increased our forecast of 2008 CD energy and fuel costs by 27% to S$320m, giving a YoY increase of 48%. This will lower CD earnings.
Rail ridership growth is in the mid-teens. For the first five months of 2008, SBS Transit’s (subsidiary of CD) rail ridership recorded a 15% YoY expansion. We attribute this to two main reasons :
• Growing population in the north-eastern part of Singapore – SBS Transit operates the North-east Line, which links commuters from the north-eastern part of Singapore to the city in the south.
• Dec 07 taxi fare hike – there was a knee jerk reaction whereby commuters switched from taxis to buses and rails in the initial months.
Bus ridership also rose moderately. SBS Transit bus ridership rose a moderate 6% YoY for the first five months of 2008. Though this is weaker than the rail ridership increase, it is stronger than the 4.3% bus ridership growth recorded in 2007.
Fare hike adds to revenue expansion. Collectively, Singapore bus and rail accounts for 16% of CD 2007 operating profit, and ridership growth will drive revenue expansion. Another positive is the mid-Jul 08 Public Transport Council announcement of a maximum fare hike of 3% for 2008 – our analysis shows that a 1% rise in fares will raise CD net profit by 1.8%. Overall, however, the effects of firm energy costs are more severe, and we have therefore lowered our core earnings forecast.
One-time gain from restructuring. In mid-Jun 08, CD announced that it will increase its stake in Cabcharge Australia through a share swap agreement. With this agreement, the following key changes will take place:
• CD’s stake in Cabcharge will increase from 5.0% to 7.46%;
• CD will transfer 16% of its shares in subsidiary CityFleet UK to Cabcharge – CD will thereafter retain a 51% stake in CityFleet while Cabcharge will hold a 49% stake.
An exceptional gain of S$26.5m (tax-free) will result from this transaction.
Target price cut to S$1.85. We are cutting our core 2008 net profit forecast by 14% to S$191.6m. Inclusive of the one-time gains, our 2008 net profit forecast is S$218.1m. Our 2009 net profit forecast has similarly been reduced. Our target price for CD, which is derived from sum-of-the-parts valuation, is being cut from S$2.00 to S$1.85. Despite this, we maintain BUY on CD, given its very attractive 2009 dividend yield of 7%.