ComfortDelgro (CDG) was re-awarded the region 4 contract by the New South Wales transport ministry on Thursday, and this should remove any negative overhang for the group’s future in one of its key markets of Australia. However, its share price has failed to react to the news and remains weak, which is unwarranted in our view. Although investors may have concerns over rising fuel prices and the potential for rate hikes, CDG is unaffected given its substantial hedge (80%) on fuel requirements for the rest of the year and low gearing position. Therefore, we feel that this recent share weakness creates an attractive opportunity for investors to allocate into this fundamentally healthy company with earnings stability. We upgrade CDG to BUY with an unchanged fair value estimate of S$1.95.
Major NSW region re-awarded
As expected by management, ComfortDelgro (CDG) has been re-awarded the region 4 contract by the New South Wales transport ministry. The contract will be for the next five years with a three year right of renewal subject to performance targets. As this region accounts for more than a third of CDG’s Australian bus contributions, this win should remove any negative overhang for the group’s future in one of its key markets of Australia.
Larger losses versus broad market unwarranted
Despite this positive development, CDG’s share price remains weak, which is unwarranted in our view, given the counter’s promising earnings growth and visibility. Since the release of its 2Q13 results only 15 days ago, the counter has fallen by 9.0% versus a broad market decline of only 5.7% for the FTSE Straits Times Index, and much of the price correction has been due to recent market volatility created by upcoming key events in Sep as well as rising oil prices and anticipated rate hikes. However, with 80% of its fuel requirements hedged at favourable prices for the rest of the year, CDG is not vulnerable to such fuel risks. In addition, with a net cash position, CDG is also unaffected by the potential for rising interest rates.
Smooth remainder of year ahead
With almost three-quarters of the year gone, we expect CDG to continue experiencing revenue growth for its SG operations (bus, rail and taxi) as demand remains healthy and ridership growth decent. Overseas, its Australian and UK bus operations should see slight increments from contributions of recent acquisitions.
Upgrade to BUY
Leaving our FY13 forecasts unchanged, our fair value estimate remains at S$1.95. However, we upgrade CDG to BUY as the recent near-term weakness creates an attractive opportunity for investors to allocate into this fundamentally healthy company with earnings stability.
As expected by management, ComfortDelgro (CDG) has been re-awarded the region 4 contract by the New South Wales transport ministry. The contract will be for the next five years with a three year right of renewal subject to performance targets. As this region accounts for more than a third of CDG’s Australian bus contributions, this win should remove any negative overhang for the group’s future in one of its key markets of Australia.
Larger losses versus broad market unwarranted
Despite this positive development, CDG’s share price remains weak, which is unwarranted in our view, given the counter’s promising earnings growth and visibility. Since the release of its 2Q13 results only 15 days ago, the counter has fallen by 9.0% versus a broad market decline of only 5.7% for the FTSE Straits Times Index, and much of the price correction has been due to recent market volatility created by upcoming key events in Sep as well as rising oil prices and anticipated rate hikes. However, with 80% of its fuel requirements hedged at favourable prices for the rest of the year, CDG is not vulnerable to such fuel risks. In addition, with a net cash position, CDG is also unaffected by the potential for rising interest rates.
Smooth remainder of year ahead
With almost three-quarters of the year gone, we expect CDG to continue experiencing revenue growth for its SG operations (bus, rail and taxi) as demand remains healthy and ridership growth decent. Overseas, its Australian and UK bus operations should see slight increments from contributions of recent acquisitions.
Upgrade to BUY
Leaving our FY13 forecasts unchanged, our fair value estimate remains at S$1.95. However, we upgrade CDG to BUY as the recent near-term weakness creates an attractive opportunity for investors to allocate into this fundamentally healthy company with earnings stability.
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