ComfortDelGro Corp

Kim Eng on 13 Feb 2013

FY2012 results in-line, profit up 5.6%. ComfortDelGro (CDG) reported a decent set of FY2012 results despite the challenges facing its local operations. FY2012 PATMI of SGD248.9m was 5.6% higher YoY. A final dividend of SG 3.5 cts was declared, bringing FY2012 total dividends to SG 6.4 cts (~3.4% yield). We believe it is difficult to justify CDG’s current lofty valuations given its recent price surge, the muted growth expectations and unexciting dividend yields. It is now time to take profit, in our view. Downgrade to SELL.

Muted growth expectations. One of the key reasons behind our thesis of taking profit at current levels is the uncertainty that lies ahead with regards to profit growth drivers. Singapore bus and rail segments’ potential for profit will largely be determined by the upcoming fare review, which would unlikely incorporate significant increases due to public pressure. This is in addition to continued start-up losses incurred from the opening of the Downtown Line. The taxi business would also be affected by the LTA’s decision to cap fleet growth in 2013 to 2%.

We also do not foresee the Automotive Engineering business repeating its stellar 38% YoY operating profit growth in 2013. It thus remains to be seen if CDG will be able to leverage its overseas businesses to fuel the entire group’s growth, while contending with rising cost pressures.

Time to call an end to our pair trade. It has almost been a year since our April 2012 Long-CDG, Short-SMRT pair trade call, which would have reaped investors a 33% differential. We believe it is now time to call an end to the pair trade as CDG’s valuations currently look rich.

Target attained + unexciting holding value = downgrade to SELL. We leave our forecasts largely unchanged, but now peg our valuations to 13.4x FY2013 PER (1 SD below mean): low single-digit profit growth figures as well as yields at ~3.5% leave us unexcited. We advise investors to SELL into CDG’s recent share price strength, as it has attained our previous target level with little holding value. TP: SGD1.64