ComfortDelGro delivered a 15% y-y increase in 3Q07 net profit. The group’s foray into the land transportation services overseas offers potential for significant earnings growth. We like the stock for its accretive overseas operations. We maintain our BUY rating and TP of SGD2.50.

Growth within expectations 3Q07 earnings in-line

ComfortDelGro’s earnings were in-line with our expectations.
The 3Q07 net profit rose 15% y-y to SGD59m on the back of strong contribution from its overseas operations. Growth was broad-based, with all major operations chalking up increases in turnover, in particular the group’s bus operations. EBIT gained 14.4% y-y to SGD93m while EBIT margin was up to 12.1% in 3Q07 from 11.2% in 3Q06.

Overseas bus operations continue to shine
The group’s bus revenue and EBIT rose 10.6% y-y and 12.6% y-y, respectively. Weaker Singapore bus EBIT was offset by stronger overseas bus EBIT in both UK and Australia, which grew by 37.4% and 117.5% y-y, respectively. The surge in overseas bus EBIT was largely due to higher contracted rates and higher mileages operated in both UK and Australia. EBIT contributions from its overseas bus operations rose to 80% in 3Q07, from 60% in 3Q06.

Taxi and rail operations posted good growth
Taxi revenue and EBIT rose 6% y-y and 28.4% y-y, respectively. The sterling performance was largely boosted by stronger Singapore operations, which saw better corporate accounts and higher rentals from new Sonata taxi fleet. As for the group’s Singapore rail operations, we expect to see further improvement in view of the steady increase in rail ridership. The group posted an operating profit of SGD2.3m in 3Q07, up 15% y-y.

Potential to unlock more value from overseas – BUY
In our view, the group’s overseas operations will remain key to its overall earnings growth. The recent spikes in oil prices had minimal impact on earnings as energy and fuel costs account for only 8.4% of total operating expenses. We have kept our FY08 earnings estimate unchanged. We have arrived at our DCF-derived target price assuming a WACC of 6.6% and a terminal growth rate of 2%. Our target price is based on 2008 P/E multiple of 20x, in line with that of major transport operators in the region. We maintain our BUY rating and target price of SGD2.50.

ComfortDelGro Q3 profit up 15% to $59m

Bus, taxi operations in UK and Australia the star performers

COMFORTDELGRO’S net profit for the third quarter ended Sept 30 rose 15 per cent to $59 million compared with the corresponding period last year, with its overseas ventures turning in a strong performance.

The land transport giant said its bus and taxi operations in the UK and Australia were the star performers. Q3 revenue rose 6.3 per cent to $771.4 million, while operating profit increased 14.4 per cent to $93 million. Overseas operating profit now accounted for 52 per cent of total group operating profit.

‘For the first time, more than half of our group operating profits came from overseas,’ said ComfortDelGro managing director and group CEO Kua Hong Pak.

‘In fact, practically all our overseas businesses improved in their performance – particularly our Australian subsidiary which more than doubled its operating profit.’

The strength of the overseas contributions meant that overseas turnover accounted for nearly 48 per cent of total group revenue – up from 44 per cent a year ago and 47 per cent in the previous quarter. As a result, the group is close to achieving its long-stated goal of deriving half of its total revenue from abroad, a target set four years ago following the merger of Comfort and DelGro.

The group’s Q3 turnover from the bus business rose 10.6 per cent to $401.3 million due to higher contributions from its UK, Australia and China operations. In Singapore, turnover at SBS Transit grew 3 per cent as daily ridership increased, but operating profit was 44 per cent lower on higher repair and maintenance, depreciation and staff costs, as well as the GST hike.

The turnover for the group’s taxi business in Q3 was up 6 per cent to $230.7 million. In Singapore, turnover for the taxi business was 5.3 per cent higher at $141.4 million due to a younger operating fleet and an increase in corporate billings. Turnover from overseas taxi operations grew by 7.2 per cent in Q3, led by the UK and China.

The Q3 turnover for the rail business jumped 20 per cent to $22.8 million as average daily ridership on the North-east MRT Line grew steadily. But total operating expenses in Q3 crept up 5.3 per cent to $678.4 million, as staff costs increased 10.4 per cent to $242.2 million, payment for contract services spiked up 18.3 per cent to $65.8 million, energy and fuel costs rose 5.2 per cent to $57.1 million and repair and maintenance jumped 14.6 per cent to $45.6 million, among others.

For the first nine months, the group’s net profit was 12 per cent higher at $172.9 million, as revenue rose 7.8 per cent to $2.23 billion. Earnings per share in Q3 rose 14.5 per cent from 2.48 cents to 2.84 cents, while year-to-date earnings per share were up 11.7 per cent from 7.46 cents to 8.33 cents. No dividend has been recommended.

Looking ahead, Mr Kua said the group’s overseas operations will continue to drive revenue and profit growth. But depreciation expense is expected to increase with the introduction of new buses in Singapore. Repair and maintenance costs are also seen to increase, while energy and fuel prices are likely to remain high and volatile.

3Q07 operating profit driven by taxi operations

CD reported 3Q07 net profit of S$59m, up 15% yoy. This was driven by a 28% yoy surge in taxi operating profit.

UK and Australia bus operations were star performers. Turnover expanded 6% yoy to S$761m, on the back of strong contributions from overseas operations. The Group’s bus operations in the UK and Australia were the star performers, accounting for over 70% of the increase. UK bus business recorded a 12% yoy turnover expansion, due to higher quality incentive payments, contract rate adjustments and increased mileages operated at Metroline. Australia bus turnover jumped 45% yoy, with contributions from Toronto Bus Services which was acquired in Jul 07. Overseas operations accounted for 48% share of turnover, up from 3Q06’s 44% – close to CD’s mid-term target of 50% share of turnover from overseas. UK bus operating profit of S$23.9m was S$6.5m higher yoy, mainly due to write-back of provisions. Australia bus operating profit was 118% higher yoy.

Singapore bus operating profit fell sharply. SBST turnover was up 3% yoy mainly due to a 4% increase in average daily bus ridership to 2.24m rides and an increase in advertisement revenue. However, operating profit of S$8.1m was sharply lower than 3Q06’s S$14.4m due to higher repair and maintenance and depreciation costs.

Operating profit was up 14.4% or S$11.7m yoy to S$93m. Besides contributions from UK and Australia bus businesses, the taxi business was another key contributor, recording operating profit of S$34.4m, which is S$7.6m higher yoy. This was due to higher turnover, lower benefits paid to taxi drivers and lower depreciation.

CD continued to generate good operating cashflow. 9M07 operating cashflow of S$232.6m amounts to an annualised 15¢ per share. We believe CD’s ability to keep its operating cashflow at a high level is a positive, especially with respect to its ability to pay out more dividends.

BUY CD. Our target price of S$2.91 comprises a) S$2.70 value based on current land-transport ownership structure, which factors in a DCF valuation of the Singapore bus, rail and advertising operations (using 2.5% terminal growth rate and WACC of 6.9%) and PE valuation for the other businesses; and b) S$0.21 based on the assumption of restructuring of the Singapore land transport system to one-operator running all rail and bus services.

A walk in the park

• Within expectations. 3Q07 net profit of S$59.0m (+15% yoy) was within consensus and our expectations, with revenue growth driven by all its business segments, especially its overseas operations in the UK, China and Australia. 9M07 net profit was S$172.9m, up 12.0% yoy and was 73% of our FY07 forecast.

• Operating expenses in 3Q07 were S$678.4m, up 5.3% yoy, attributable to higher staff costs, contract services, repair & maintenance, vehicle leasing charges and insurance & accident compensation. Materials & consumables declined 15% yoy to S$60.8m while taxi drivers’ benefits fell 29.1% to S$16.6m. Energy costs rose modestly by 5.2% yoy to S$57.1m, aided mainly by fuel hedging. Operating profit grew 14.4% yoy to S$93.0m on the back of good financial management.

• Bus segment continues to be boosted by overseas operations, turning in revenue growth of 10.6% yoy to S$401.3m in 3Q. Operating profit rose 12.6% yoy to S$41.0m, on writeback of provisions in the UK operations, and improved rates, increased charters and maiden contributions from recently acquired Toronto Bus Services. Singapore bus operations posted lower operating profit of S$8.1m due to higher repair & maintenance, depreciation, staff costs and higher GST. Turnover and operating-profit mix from overseas bus operations was 62.7% and 80.2% of group bus operations, respectively.

• Taxi revenue grew 6.0% yoy to S$230.7m, mainly from Singapore and UK. However, operating profit was higher by 28.4% yoy to S$34.4m, on higher rental rates in Singapore and China, and maiden contributions from newly acquired Flightlink and Computer Cab.

• Rail operations continued to support growth momentum, with an operating profit of S$2.3m, up from S$0.3m in 3QFY06, supported by higher average daily ridership for the North-East Line and Punggol and Sengkang LRT lines.

• Other segments. Driving school and vehicle inspection and testing operations continued to post good revenue growth of 15.3% yoy, while automotive engineering, diesel sales and car rental operations remained relatively stable.

• Maintain Outperform and target price of S$2.38. On our unchanged DCF valuation (WACC 8.0%, terminal growth 1%), our target price remains S$2.38. The stock should be well-supported by its attractive dividend yield of over 5%.

A more comfortable ride

Our view

Anchor themes

With healthy economic growth and initiatives to transform Singapore into a global city, demands for improved transport infrastructure to cater to a growing resident and transient population will put increased pressure on existing key domestic operators to improve, upgrade, expand and re-organise their operations.

ComfortDelgro’s overseas investments will drive near-term growth with recent acquisitions in bus and taxi operations in Australia and China, as well as the UK, likely to contribute more significantly to earnings in FY07F and FY08F.

1. Domestic bus capex to rise on fleet upgrade

Scania AB, Sweden’s second-largest maker of trucks and buses, recently announced that it had won a significant order for 500 city buses from ComfortDelgro’s separately listed bus subsidiary SBS Transit. On our estimates, the latest order, which Scania has said is its largest ever in Asia, will cost the group S$150mn.

We believe the order is part of the group’s overall strategy to progressively replace and upgrade its ageing fleet of 2,530 buses. The average age of CD’s buses is now about 12.5 years, and while
the group has extended the useful life of the buses to 21 years, the high occurrence of breakdowns recently is affecting service standards, which are closely monitored by the Land Transport Authority.

SBS Transit is Singapore’s largest scheduled bus operator, with its 2,530 buses making a total of 2.1mn passenger trips per day, with 223 scheduled routes and a total network of 6,522km. The group’s nearest competitor is SMRT’s bus services, with a much smaller fleet of 800 buses plying 74 routes.

We have raised our FY07-10F assumptions for group capex from S$290mn to S$350m pa, to account for the increased spending. Besides the Singapore buses, CD will likely continue to expand its vehicle engineering and bus depot facilities in the UK, China and Australia.

2. Fare hike in bus / rail in October, though higher fuel costs bite

As expected, both the bus and rail sectors pushed through a rate hike of about 1.5-2% this month, in line with a formula set out since 2005. CD’s domestic bus operations account for about 45% of overall bus operations’ 2Q07 EBIT of S$30.8mn.

Despite the fare increase, we believe the group’s domestic bus operations are likely to be hurt by the high fuel prices in 3Q07, given that the group was totally unhedged in the quarter. SBS Transit hedged its fuel requirements in 1H07 at an attractive US$50-55/bbl, compared with last year’s average of US$66/bbl, which had a positive impact on bus earnings in the first half.

We have cut our FY07F earnings forecast by 2.5%, primarily to account for higher fuel costs for SBST’s bus operations in 2H07. We have raised our FY07F group fuel cost assumptions by 7%, which has resulted in a 1.5% fall in the domestic bus EBIT margin to 9%, with overall domestic bus FY07F EBIT now at S$51mn, against S$59.7mn previously.

Still, the latest traffic figures show that CD’s domestic bus and rail ridership continue to see a fairly robust uptrend, with the group’s NorthEast Line ridership in particular showing double-digit gains. Bus ridership rose 3.6% y-y to 2,258,669 per day in August, while August’s rail ridership rose 19.8% y-y to 308,723 per day. For the year to date (January-August), average daily bus ridership is up 4.2% to 2.2mn per day while rail ridership is up 19.7% y-y to 297,082 per day, ahead of our estimates of 2.1mn and 280,000, respectively.

3. LTA review — still waiting for news

In January, the Land Transport Authority appointed Booz Allen Hamilton (Australia) Limited (BAH) as the external consultants for a structural review of Singapore’s public transport industry, particularly for mass public transport, ie, bus and rail. According to the LTA, its target is to raise the public transport share from the current 63% to 70% of the total transport industry over the next 10 to 15 years.

We believe the consultants have submitted their findings (the target timing was mid-2007), with the LTA currently reviewing and evaluating recommendations. We believe it is likely that the LTA will make known the review results and its decisions in the next six to 12 months.

4. Growth to come from overseas operations/acquisitions

Management expects to continue to make overseas acquisitions, with strategic, bolt-on buys, particularly in Australia and China. Benefits are also likely for the group’s UK bus operations, on an extension of the Western Concession charging zone, where Metroline mainly operates.

CD has grown its overseas business significantly, with these operations already accounting for 33% of group 1H07 PBT of S$360.8mn and 44% of sales. In the UK, the group’s Metroline bus business holds a 14% market share, and runs 77 contracts with 1,183 buses, while its 65%-held partnership with Stagecoach in Scotland runs 91 buses. By the end of 2006, the group’s total investment in the UK reached S$295.8mn.

In Australia, the group now operates a total of 693 buses on 123 routes, and has accumulated a 25% share in the metropolitan Sydney private bus transport market, with total investment as at FY06 in Australia at S$151.5mn.

Besides its fairly extensive taxi operations in China (5,029 taxis in Beijing and 1,800 in Shenyang), CD also operates a sizeable bus business. Its largest bus operation is in Shenyang, with 1,818 buses, followed by Shanghai with 535 buses.

In FY06, UK PBT rose 19% y-y to S$60.4mn, China PBT earnings gained 29% y-y to S$42.4mn, while Australia’s grew 8x times to S$17mn.

5. Robust cashflow, attractive yield. BUY reaffirmed

Despite the earnings cut and higher capex assumptions, we maintain our BUY rating on CD given the group’s robust financial position, steady cashflow and relatively attractive dividend yields relative to peers. With the earnings cut and increased capex spend assumptions, our fair value now stands at S$2.27 (previous: S$2.65) based on DCF (method unchanged). Group ROE remains at 16%, while the dividend yield remains relatively attractive (5.6% for FY07F, 4.4% for FY08F).