SGX Yield Stock

Steady outlook

• H110 net profit of S$113m in line with ests; 48% of UBS’ 2010E forecast

Q210 revenue grew S$31m YOY: Singapore taxis, buses and rail benefitted from strong domestic demand. Australian buses gained S$23m on more services and a

10% forex impact. CDG will pay interim DPS of S$0.027 (50% payout).

• H110 op profit from S’pore taxi and bus grew 8% YOY, and rail by 34%

CDG achieved 100% utilisation (fr 99% in Q1) on a slightly enlarged taxi fleet and the outlook for coming quarters appears positive based on CDG’s comments that they now have a waiting list from drivers for their taxis, a situation which we recall has not been observed since Sg’s taxi industry was liberalised in late 2003. Meanwhile, we expect ridership growth on the North East Line (+12% YOY) to remain high. The NEL is in an operating leverage sweet spot as ridership has already passed the breakeven point, but train carriages are not filled to capacity.

• Overseas operations: Australia growth offsets weak UK taxis

In A$ terms, Australia bus revenue grew 22% YOY due to a full quarter of profit from Melbourne. QOQ, profit grew on more routes operated in both Melbourne and Sydney. CDG expects upcoming growth from Australia to stay strong as more services have been secured. CDG’s high-teen Australian margins are buffered from rising cost pressure as contract terms allow for recovery of certain costs. CDG’s acquisition of Swan Taxis in Perth for A$39m, if successful, would boost 2011E net profit by about 1.5%.

• Valuation: Price target based on UBS VCAM

We use DCF and forecast long-term valuation drivers using UBS VCAM.

2Q10 results in line, higher rail, bus and taxi contribution

2Q10 results in line with expectations and consensus. 2Q10 earnings rose S$58m (+2% YoY) with growth mainly from continued ridership momentum in rail/bus in Singapore (SG), improvement in operating environment in SG taxi and increase in bus services in Australia (Aust). We expect 2H10 earnings to be stronger due to continued ridership growth momentum in bus/rail and overseas contribution. CD remains positive on rail in SG, bus operations in Aust/SG and sees improvement in taxi business in SG.

Australia driving bus growth, fuel cost partially hedged. 2Q10 bus revenue +5% YoY and 4% QoQ to S$400m on the back of strong performance in Aust (+34% YoY to S$91m) and SG (+4% YoY to S$152m), partially offset by UK (-8% YoY to S$140m) due to weaker pound. 2Q10 EBIT +7% YoY and 14% QoQ to S$38m underpinned by growth from Aust (+37% YoY to S$16m), partially offset from SG, UK and China bus ops due to higher fuel costs. We expect 3Q10 CD’s bus ops to see a QoQ improvement underpin by higher ridership, increase in bus services in Australia and lower fuel costs as CD has hedged about 25% of its fuel requirements for 3Q10 at slightly below US$70/bbl.

Strong growth from rail and taxi business. Rail revenue in 2Q10 grew 15% YoY and 5% QoQ to S$33m aided by ridership growth. EBIT for rail grew 43% YoY and 11% QoQ to S$7m on the back of higher efficiency. Taxi revenue saw a 4% and 1% QoQ increase to S$239m, mainly due to the growth in SG taxi ops. EBIT grew 12% YoY and 22% QoQ to S$32m due mainly to higher fleet size and low idle rate at its taxi ops in SG.

CD remains our preferred land transport stock as a defensive low-beta play and we expect the stock to outperform the market if there is a pullback. Award of DTL is likely to be in the 2Q11 as the tender for the submission of bids has been delayed to 4Q10. Buy.

2Q FY10 results: strength in Singapore taxis and Australia bus

• 2Q net profit in line: Net profit of S$58.2 (+1.6% Y/Y) was in line with expectations with revenue growth of 4.1% driven by good performance at (1) CDC NSW; (2) SBS Transit; (3) Singapore taxi; (4) NEL and (5) China driving centre. Interim DPS of 2.70 cents was declared (50% payout ratio).

• Singapore taxis posted strong EBIT growth: Singapore taxi revenue grew 9.2% Y/Y on the back of larger operating fleet and higher volume of cashless transactions. Management highlighted that it added 307 taxis in the last quarter and enjoys a near zero idle rate, with a waiting list of prospective taxi hirers. Notably, operating profit grew a strong 38% Y/Y as margin improved from 10% to 12.7%.

• Australia bus performance strong: Australia bus revenue/EBIT grew 34%/37% Y/Y as more bus services were contracted by CDC NSW and Victoria, and partly buoyed by the stronger AUD. For 2Q10, Australia bus was the second largest operating profit contributor (16% of group) after Singapore taxi, despite accounting for just 11.5% of group revenue, due to its high operating margin at 17%.

• Energy costs increase: Fuel and electricity costs rose 22.3% Y/Y mainly due to higher diesel costs which were not fully hedged as well as increased consumption. Management is taking advantage of the recent retreat in oil price to hedge its requirement ahead.

• Downtown Line tender update: Management expects tender for the DTL to be issued in Sep/Oct 2010 with the submission of the bid in early 2011. We continue to see its subsidiary, SBS Transit, well positioned to win.

• Positive organic growth outlook: Management sees stronger revenue for Singapore and Australia bus on stronger ridership (2Q10: +4% Y/Y) and increase in demand for bus frequencies respectively. It also expects Singapore taxi revenue to increase potentially from higher average rentals with new replacement taxis and possibly also from fleet additions to take advantage of the higher demand. Rail ridership, which grew 13% YTD should continue to see ridership growth and benefit from transfer commuter traffic with the ramp up of SMRT’s Circle Line. Maintain OW.

Boosted by stronger A$

• In line; maintain Outperform. 2Q10 core net profit of S$58.2m (+1.6% yoy) was broadly in line with our estimate (S$58.3m) and consensus, accounting for 26% of our full-year estimates. 1H10 earnings came in at S$112.5m (+2.5% yoy), accounting for 51% of full-year estimates. We maintain our earnings estimates. Our target price rises from S$1.64 to S$1.83 (WACC: 10.4%, terminal growth: 2%), after removing a 10% discount to our DCF valuation as we believe that currency risks have been priced in. Maintain Outperform on the back of an improving outlook.

• Helped by stronger A$. 2Q10 group revenue was up 4.1% yoy to $789.3m thanks to growth in revenue from the bus, the taxi, rail, vehicle inspection and testing, driving centre, bus station and car rental and leasing businesses, offset by the decrease from the automotive engineering services business. Revenue growth was also boosted partially by a positive forex translation effect ($15.2m) thanks to a stronger A$, offset partially by weaker £ and RMB. Group operating expenses grew mainly thanks to higher fuel and electricity costs, higher cost of diesel for resale, higher staff costs, lower Job Credits in Singapore, higher payments to drivers for contract services and higher depreciation due to more new and replacement buses and taxis.

• Operational review. 2Q10 bus revenue grew 5% yoy on higher revenue from Singapore due to higher ridership (+4.1% yoy) and higher Australia revenue due to the positive translation effect of the A$, offset by lower UK revenue due to the negative translation effect of the £. Taxi revenue grew 3.5% yoy thanks mainly to higher Singapore revenue due to larger operating fleet and higher volume cashless transactions, offset by lower overseas revenue. Despite the fare reduction, rail revenue was higher by 14.3% yoy thanks to higher ridership.

As stable as it can get

At a Glance

• 2Q10 net profit (S$58.2m) up a marginal 2% yoy, as expected

• Singapore bus ridership up 4% despite CCL opening – better than expected

• FY10-11F revised by 3% on higher bus ridership

• ComfortDelgro offers better value at 14.5x PE vs SMRT’s 19x, but no compelling catalyst; Maintain Hold, TP at S$1.65

Comment on Results

2Q10 net profit +2% as expected. 2Q net profit was up marginally by 2% y-o-y to S$58.2m, as topline grew 4.1% to S$789.3m mainly driven by Singapore bus, taxi and Australia bus operatations. Operating margins inched up to 12.6%, as operating expenses grew by smaller 3.9% vis-à-vis revenue. Bulk of increase in expenses came from fuel/energy (+22% yoy). Net profit showed a smaller growth of 2% on higher finance costs (S$8.6m, +18%) lower JV/Associates income (S$1.4m, -18%). A 2.7 S cts interim dividend was declared (1H09: 2.63 Scts), equating to 50% payout ratio.

More fuel hedges in place in 3Q (vs 2Q), but not beyond that. We understand that management had hedged c.50%/15% of Singapore/UK requirements in July/Aug and will look to put in more hedges.

Singapore bus ridership up 4%, despite CCL, better than originally expected. Despite the opening of the Circle Line Stages 1&2 on 17 Apr, Singapore’s bus ridership grew 4% yoy in 2Q. We think the cannibalization effect may not be as severe as originally feared. We are more optimistic on bus ridership, nudging our growth assumption to 4%, from 1.5% previously.

$38.8m Swan Taxis acquisition pending approval. The Group’s bid for Perth based Swan Taxis is awaiting approvals, expected in 4Q. We have not factored in potential contribution, but estimate this could add c.2% to FY11F profits, if it materialises.

Recommendation

More value in ComfortDelgro vs SMRT, but no compelling upside/catalyst. Maintain Hold, TP: S$1.65. Between the 2 land transport counters, we prefer ComfortDelGro over SMRT (FV, TP: S$1.88) given its more attractive valuation at c.14.5x PE vs SMRT’s 19x (FYE Mar’11). But, we do not see any compelling catalyst at current point to drive its share price, given the moderate growth in the ensuing quarters. As such, we maintain Hold, TP S$1.65 based on average of 15x PE and DCF.