ComfortDelgro

OCBC on 23 May 2012

ComfortDelgro Corporation Limited (CD) is the second largest land transportation company in the world with a global network of over 46,300 vehicles spanning seven countries. Bus and taxi are its main operating segments, contributing almost 80% of revenue (1Q12) and 69% of operating profits (OP), while domestic operations constitute 59.3% of revenue. Its recent 1Q12 results also showed broad-based increases across most operating segments. And we expect this modest growth to continue but anticipate subdued OP margins, as domestic pressures squeeze margins on its bus and rail segments, and marginalising positive results from its taxi and overseas ventures. Forecasting only slight increases in OP margins in FY12/13, we utilised the dividend-discount model (DDM) for our valuation with a conservative payout assumption of 50% of PATMI. Initiate coverage with HOLD at a fair value estimate of S$1.53.

Global land transportation giant
ComfortDelgro Corporation Limited (CD) is the second largest land transportation company in the world with a global network of over 46,300 vehicles spanning seven countries. Its main operating segments are bus and taxi, which contribute almost 80% of revenue (1Q12) and 69% of operating profits (OP). CD also has segments providing rail, vehicle inspection, automotive engineering and driving centre services. Geographically, its domestic operations constitute 59.3% of revenue, with the rest coming from overseas ventures.

Top-line growth to continue…
From FY2003-11, CD’s revenue grew at a decent CAGR of 8%, and its recent 1Q12 results also showed broad-based increases across most operating segments. With continuous support from increasing ridership levels on its bus and rail operations, boosted by greater fleet utilisation and increased cashless transactions in its Singapore taxi business, we expect CD’s top-line to continue on its upward trajectory, albeit at slower pace of 4.6% in both FY12 and FY13.

…but operating margins could face some pressure
However, CD’s bus and rail segments in 1Q12 contributed only 7.2% of the group’s OP despite having a 23% share of revenue. We expect the Singapore bus and rail segments to be a drag on operating profit (OP) margins going forward as 1) regulatory pressures and public sentiment related to the public transportation system will reduce the possibility of positive fare adjustments, 2) operating expenses increase due to higher repair/maintenance and fuel/electricity costs on the back of increased service runs, and 3) expansion costs related to the upcoming Downtown Line.

Initiate with HOLD - conservative assumptions applied
With domestic pressures limiting OP margin growth, we forecast only slight increases for FY12 (+0.2ppt) and FY13 (+0.5ppt). Utilising the dividend-discount model (DDM) for our valuation, with a conservative payout assumption of 50% of PATMI (CD has a policy of distributing at least 50% of net profit to shareholders), we obtain a fair value estimate of S$1.53, representing an upside of 3.2% over its current price, and initiate coverage with HOLD.