Fairly valued at this point

• 2Q13 results in-line
  
• A smooth 2H13 to be expected
  
• But limited upside for time being
  

2Q13 results within expectations

ComfortDelGro’s (CDG) 2Q13 results were in line with expectations. Higher bus/rail ridership and rental income from its taxi fleet boosted revenue by 2.7% YoY to S$908.4m while operating profit grew by 6.0% to S$112.6m as lower fuel costs helped to improve operating margin (12.4% vs. 12.0% in 2Q12) and offset higher staff costs. 2Q13 PATMI came in 6.0% higher YoY at S$68.9m. For 1H13, CDG announced an interim dividend of 3 S cents (vs. 2.9 S cents for 1H12).

More of the same for 2H13

For 2H13, we expect continued revenue growth for SG operations (bus, rail and taxi) while Australia and UK bus operations should see slight increments from contributions of recent acquisitions. Cost pressures related to higher staff costs (ramp up of Downtown Line etc) are to be expected but the current fuel environment and hedges in place should help to mitigate the impact on operating margins.

Region 4 auction & SG fare review

Nonetheless, there exist some dampeners. Although management expressed confidence in re-securing bus services to Region 4 (NSW, Australia) – the results of the tender process will be known by end-Aug/early-Sep – lower operating margins are to be expected given the increase in competitive pressures. In addition, any SG fare increases are only likely to be known in late 4Q13 or early-FY14.

HOLD for now

We leave our FY13 forecasts unchanged given the in-line results. However, while we continue to prefer CDG over SMRT for its management and more diversified earnings streams, we feel that much of the upside has been priced in already and the lack of any near-term catalysts limit further gains. Therefore, we downgrade CDG to HOLD for the time being and maintain our fair value estimate at S$1.95.

Fairly valued at this point

• 2Q13 results in-line
  
• A smooth 2H13 to be expected
  
• But limited upside for time being
  

2Q13 results within expectations

ComfortDelGro’s (CDG) 2Q13 results were in line with expectations. Higher bus/rail ridership and rental income from its taxi fleet boosted revenue by 2.7% YoY to S$908.4m while operating profit grew by 6.0% to S$112.6m as lower fuel costs helped to improve operating margin (12.4% vs. 12.0% in 2Q12) and offset higher staff costs. 2Q13 PATMI came in 6.0% higher YoY at S$68.9m. For 1H13, CDG announced an interim dividend of 3 S cents (vs. 2.9 S cents for 1H12).

More of the same for 2H13

For 2H13, we expect continued revenue growth for SG operations (bus, rail and taxi) while Australia and UK bus operations should see slight increments from contributions of recent acquisitions. Cost pressures related to higher staff costs (ramp up of Downtown Line etc) are to be expected but the current fuel environment and hedges in place should help to mitigate the impact on operating margins.

Region 4 auction & SG fare review

Nonetheless, there exist some dampeners. Although management expressed confidence in re-securing bus services to Region 4 (NSW, Australia) – the results of the tender process will be known by end-Aug/early-Sep – lower operating margins are to be expected given the increase in competitive pressures. In addition, any SG fare increases are only likely to be known in late 4Q13 or early-FY14.

HOLD for now

We leave our FY13 forecasts unchanged given the in-line results. However, while we continue to prefer CDG over SMRT for its management and more diversified earnings streams, we feel that much of the upside has been priced in already and the lack of any near-term catalysts limit further gains. Therefore, we downgrade CDG to HOLD for the time being and maintain our fair value estimate at S$1.95.

Steady Profits In-line With Expectations

2Q13 steady, in-line with expectations. CDG reported another steady set of results with net income of SGD68.9m (+19% QoQ, +6% YoY) in 2Q13. Except for lower Auto Services sales due to the ongoing divestment of its car dealership business in China, top line growth was broad=based. With the stronger first half performance, the company declared higher interim dividend of 3.0cents (FY12: 2.9cents).

Strong UK bus contributions, Bus losses at SBST narrowed. Despite the relatively weaker GBP, its UK bus operations reported stronger EBIT due to improved margins on receipt of incentives in the quarter. With lower operating cost from favourable diesel hedges, core operating losses at the Singapore bus unit (SBS Transit) narrowed to SGD3.0m (2QFY12: -4.8m, 1QFY13: -5.4m). We believe that a potential change in business model for the Singapore bus operations could reverse sustained losses for the operators.

Weak rail profits to continue in near term. Excluding advertising and rental income, CDG’s rail operation slipped into the red as the unit incurs higher start up costs for Downtown Line (DTL) of c.SGD4m in the quarter. Excluding start up related expenses for DTL, the matured North East Line (NEL) turned in stable EBIT of SGD3.3m (2QFY12: +3.1m, 1QFY13: +3.6m). Management guided for incrementally higher rail operating expenses as they prepare for the opening of DTL stage 1 at the end of the year.

Optimistic on re-tender of bus operations in Australia. CDG participated in the re-tender for their existing Region 4 bus operations in Australia. While the potential loss of this key operating region is a near term stock risk, management sounded optimistic on the tender results that are expected to be announced within the next two months.

Maintain Buy with TP of SGD2.33 unchanged. We maintain our Buy rating on the stock as we believe that acquisition-led growth would continue to drive firm earnings over the coming quarters. Our TP of SGD2.33 is based on 18X FY14E P/E to capture full year contributions from its recent acquisitions.

GOOD ENTRY POINT

• Share price stabilising
  
• Fundamentals unchanged
  
• Time to pickup a high-quality counter on the cheap
  

Share price stabilising since stake sale

ComfortDelgro’s (CDG) is showing signs of stabilising after the partial stake sale by the Singapore Labour Foundation about a month ago (at its lowest, CDG fell by more than 20% from when the sale was completed). At this juncture, we believe that it is a good opportunity to pick-up a high-quality counter on the cheap and, potentially, on the rebound.

Fundamentals unchanged

Domestic challenges aside, the group’s overseas growth prospects, which have been its key growth driver, remain unchanged. As a recap, CDG recently made an acquisition for its UK operations that expanded its fleet size by 41% – along with additional service routes – and increased its market share to joint-second in the city. (This deal should become income accretive beyond FY13). In addition, CDG is in the process of tendering for additional bus routes in New South Wales (Australia) – as well as re-submitting its bid for its existing routes – and we are hopeful for positive results come Jul this year. More importantly, its UK and Australian bus segments are operated on a cost-plus model, which significantly limits its downside risks.

Positives from fare review delay

Although the Fare Review Mechanism Committee (FRMC) announced earlier in the month that it has delayed the submission of its findings by a few months, the likely outcome of a fare increase remains on track, in our view. Furthermore, the delay should be viewed as a strong political will to devise a fare review structure that will be sustainable and more beneficial to the public transport operators in the long-run, rather than a one-off fare increase to paper current deficiencies.

Time to accumulate

Given its recent share stability and unchanged fundamentals, we upgrade CDG to BUY with an unchanged fair value estimate of S$1.95.

Growth through acquisition

Focusing on the business units that matter. Despite the diversity of CDG’s businesses, three major business units (Singapore Taxi: 23%, Australia Bus: 22%, UK/Ireland Bus: 12%) would collectively account for more than 56% of the group’s FY15E operating profits. While certain business units will experience near term challenges, these three core profit contributors will sustain the group’s earnings over the next 3 years.

UK & Australia bus to lead profit growth. Driven by a series of acquisitions, we forecast annual EBIT growth of 7% and 4% for CDG’s UK and Australia bus businesses over the next 3 years. Leveraging on their growing scale of operation, successful bids for new routes would provide further upside to our forecasts.

Singapore Taxi remains a key profit contributor. Despite conceding market share over the past 5 years (FY12: 58% vs FY07: 64%), management had demonstrated a strong profit focus at its Taxi operations in Singapore. While its fleet grew by merely 2% p.a. between FY08 to FY12, EBIT increased at a CAGR of 16% from SGD52mn to SGD93mn over the same period of time. We attribute the strong profitability of CDG’s operation to two key factors: 1) prudent fleet expansion at a time of high COE prices and 2) leveraging on its scale to grow an alternative income stream.

Limited exposure to negatives at Singapore’s fare based business. Profitability of Singapore’s rail and bus operators had been under pressure. While we have a negative near term view on Singapore’s fare based businesses, we argue that CDG’s diversification efforts have reduced their dependency on them. With CDG’s exposure to Singapore’s fare based at merely 8% of its market capitalization, we believe that their exposure is limited.

Valuation. CDG offers a unique defensive stock exposure with diversified earnings and geographical exposure. With continued weakness on the economic front, we expect sustained preference for defensive stocks in the year ahead. We value CDG using a FY14E P/E of 18X and derive a TP of SGD2.33. Upgrade to Buy.