ComfortDelgro

OCBC on 7 Sept 2015

Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. However, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. Consequently, our DDM-derived FV drops from S$3.07 to S$2.99. Maintain HOLD as we still like CDG for its stability and diversified revenue stream.

Potential fare cut in Singapore effective end-FY15
Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. We highlight that this announcement of fare reduction by year-end came as a surprise to us, especially when the most recent fare hike of 2.8% only came into effect Apr 15. Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. With the transition to the new bus government contracting model (GCM) to commence 2H16, any fare adjustment thereafter will not impact revenue contribution from Singapore bus operations since revenue risk will be passed on to LTA.

Minimal impact given diversified revenue base
In our view, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Based on FY14 financials, CDG derived ~59% of its total revenue from Singapore. However, we estimate revenue contributions from rail and bus operations in Singapore only made up ~5% and 15-20% of CDG’s total revenue in FY14 respectively. Furthermore, with GCM to commence from 2H16, the fare cut will have no impact to CDG’s bus revenue contribution since LTA keeps all bus revenue collected while paying CDG a negotiated annual fee for operating public buses. With DTL phase 2 (DTL) slated to commence operations by year-end, a 1.9% fare reduction in FY16 will certainly be negative but unlikely to be significant for CDG.

Slightly lower FV; maintain HOLD
Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. Consequently, our DDM-derived FV drops slightly from S$3.07 to S$2.99. Maintain HOLD as we still like CDG for its stability and diversified revenue stream.

ComfortDelGro

OCBC on 14 Aug 2015

ComfortDelGro (CDG) continued its steady growth in 2Q15 as PATMI increased 6.9% YoY to S$80.9m on the back of a 2.1% growth in revenue to S$1.04b, driven mainly by Bus (+4.1%), Rail (+6.8%) and Taxi (+3.3%) segments. Looking ahead, we continue to expect CDG to record stable growth with diversified revenue base as management guided for revenue from CDG’s bus, rail and taxi segments to increase. Over the longer-term, bus restructuring in Singapore will turn core operations sustainably profitable from 2H16 onwards. Also, with Downtown Line Phase 2 (DTL2) expected to open in Dec 15, we can expect it to contribute to rail revenue growth from FY16 onwards. Stability is a key characteristic of CDG and we like its diversified revenue base and strong balance sheet. Maintain HOLD with the same FV of S$3.07.

Steady 2Q15 performance
ComfortDelGro (CDG) continued its steady growth in 2Q15 as PATMI increased 6.9% YoY to S$80.9m on the back of a 2.1% growth in revenue to S$1.04b, driven mainly by Bus (+4.1%), Rail (+6.8%) and Taxi (+3.3%) segments, but partially eroded by weaker AUD and GBP against SGD. 2Q15 operating expenses rose 2.2% YoY to S$916.3m mainly from higher staff costs (+3.1%), depreciation (+9.2%) and contract services costs (+7.2%) but offset by lower fuel and electricity costs (-10.2%) and lower materials and consumables (-8.9%). Consequently, 1H15 results were within expectations as revenue grew 1.7% YoY to S$2.0b, while PATMI rose 6.8% to S$148.5m and formed 48.4% of our FY15 forecast. The proportion of overseas contributions declined YoY, likely due to weaker currencies.

Stable growth from diversified revenue base to sustain
Looking ahead, we continue to expect CDG to record stable growth with diversified revenue base as management guided for revenue from CDG’s bus, rail and taxi segments to increase. Bus segment growth continues to be driven by: 1) higher ridership and fares in Singapore, 2) new routes and service enhancements in UK to offset weaker GBP, 3) contribution from Blue Mountains bus services in Australia to offset weaker AUD. We also note for Singapore bus segment, this operation will turn sustainably profitable on stable margins post transition to the new bus government contracting framework from 2H16 onwards. For the rail segment, growth is likely to come from higher ridership due to: 1) more new trains to be added to the North-east Line (NEL) in FY15, and 2) Downtown Line Phase 2 (DTL2) is on track to open by Dec 15 and is likely to contribute significantly. For taxi, we expect fleet expansion and renewal of taxi fleet in Singapore to drive taxi revenue growth through higher rental income.

Strong balance sheet; maintain HOLD
Stability is a key characteristic of CDG and we like its diversified revenue base and strong balance sheet. With an in-line set of 1H15 results, we keep our forecasts unchanged. Maintain HOLD with the same FV of S$3.07.

ComfortDelGro

OCBC on 2 Jul 2015

A series of positive developments within the Land Transport sector reinforce our view that ComfortDelGro will continue to enjoy its smooth ride into 2H15. There are three key things to note: 1) Downtown Line (DTL) phase 2 that was initially scheduled for opening in 1Q16 will now open ahead of schedule in Dec-15 (CDG’s management target breakeven on DTL between DTL phase 2 and phase 3), 2) adjustment to method of computing taxi availability standards, which we think allows greater flexibility for CDG to manage their taxi fleet, and lastly, 3) CDG’s announced intention to seek opportunities in London’s rail business. In our view, these three developments are positive and encouraging but did not come as a surprise. Hence, we keep our forecasts unchanged and maintain HOLD with FV of S$3.07.

DTL phase 2 will open in Dec-15
Initially scheduled to open in 1Q16, LTA recently announced that the Downtown Line phase 2 (DTL 2) will open ahead of schedule in Dec-15. DTL 2 comprises one depot and 12 stations, of which four are interchanges linking the DTL to the North-East Line, North-South Line, Circle Line and Bukit Panjang LRT, respectively. According to LTA, construction works for DTL 2’s stations are currently more than 95% complete, while Mechanical & Electrical installation works are in the final stages for all the 12 stations. Testing of train operations are also underway since Apr-15 and will continue into 3Q15. Recall that CDG’s management guided for breakeven on DTL between opening of DTL 2 and DTL phase 3. Hence, in our view, this is certainly a positive development for ComfortDelGro (CDG).

Positive change to method of computing taxi availability
Being the largest taxi operator in Singapore, CDG had been subject to LTA’s Taxi Availability standards (TA) since 2013. The two main criteria of the TA are meeting stipulated percentage of taxis: 1) on the roads during peak periods, and 2) minimum daily mileage of 250km. Previously, the TA were computed based on registered fleet, which does not account for each taxi company’s unhired fleet at any one time for valid reasons such as maintenance purposes. The new TA computation will thus be based on the company’s hired-out fleet, which more accurately measures the availability. We believe this change will ease pressures on taxi companies’ ability to meet the TA standards. While CDG has been the only one to consistently meet the criteria since the inception of the TA standards, we think this change is still positive as it provides greater flexibility for CDG to manage its fleet of taxis.

Seeking opportunities in London’s rail business
CDG’s recently announced intention to seek opportunities in London’s rail business is encouraging, seeing that management is taking actions in expanding CDG’s overseas businesses. As we think these recent developments are positive but not unexpected, we keep our forecasts unchanged. Maintain HOLD with FV of S$3.07.

ComfortDelGro

UOBKayhian on 28 May 2015

FY15F PE (x): 20.1
FY16F PE (x): 16.4

9% price pullback from the recent high presents a potential opportunity. We view the recent share price retracement as a buying opportunity. Given the uncertain outlook of equity markets, we believe CD’s resilient earnings and strong financials will be favoured. Opening of DTL stage 2 to feed traffic growth. We expect the Downtown Line (DTL) stage 2 to commence operations in 1Q16 while ridership continued to gain traction for stage 1 (DTL1). Average daily riderships for DTL1 grew 24.1% yoy to 67,000 passenger trips but this could be boosted further the opening of DTL stage 2 is expected to feed more traffic into DTL1. Upgrade to BUY with a DCF-based target price of S$3.30. At our target price, the implied 2016F PE of 18.4 is close to its +1SD valuation but we believe this is justified given its strong earnings track record and cash flow.

Land Transport Sector

OCBC on 20 May 2015

While ComfortDelgro (CDG) had a relatively smooth journey through 1QCY15 on diversified revenue growth, SMRT’s cost recovery momentum seen for the first three quarters of FY15 was marred by higher depreciation from expanding train and bus fleet and higher repair and maintenance (R&M) expenses for the ageing rail system and more scheduled maintenance, which is in-line with the larger train and bus fleet. Nonetheless, the two public transport operators (PTOs) continue to exhibit YoY improvements and are expected to benefit from the ongoing regulatory changes in Singapore’s land transport industry. We are still positive on Singapore’s land transport sector outlook on two key medium to longer-term catalysts: 1) transition to the new bus government contracting model (GCM); and 2) transition to the new rail financing framework (RFF) that will benefit SMRT more than CDG. We believe the catalysts driven by regulatory changes will positively change the earnings profile of both PTOs. Hence, we maintain OVERWEIGHT on the land transport sector. Given the current share prices, our top pick is still SMRT [BUY; FV: S$1.85] and we think CDG [HOLD; FV: S$3.07] is fairly priced for now.

Review of 1QCY15 results
ComfortDelGro’s (CDG) 1Q15 results came in largely within expectations continuing its stable growth journey. Its 1Q15 PATMI rose 6.8% YoY to S$67.6m on the back of higher revenue driven by Bus (+2.2%), Rail (+8.1%) and Taxi (+5.2%) segments but eroded by weaker AUD and GBP. SMRT Corp (SMRT) on the other hand, posted a set of disappointing FY15 performance even as PATMI jumped 47% to S$91.0m. SMRT’s cost recovery momentum seen for the first three quarters of FY15 was marred by higher depreciation from expanding train and bus fleet and higher repair and maintenance (R&M) expenses for the ageing rail system and more scheduled maintenance, which is in-line with the larger train and bus fleet. SMRT’s FY15 revenue growth was mainly driven by higher ridership, average fares and rental income. Nonetheless, the two public transport operators (PTOs) continue to exhibit YoY improvements and are expected to benefit from the ongoing regulatory changes in Singapore’s land transport industry.

Recent development reinforce positive outlook
We are still positive on Singapore’s land transport sector outlook on two key medium to longer-term catalysts: 1) transition to the new bus government contracting model (GCM); and 2) transition to the new rail financing framework (RFF) that will benefit SMRT more than CDG. Looking over the past few months, one key development in the changing landscape of the sector is worthy of mention – LTA awarded the first bus package (Bulim) contract to Tower Transit Group (TTG). Earlier in Mar 15, LTA released details of the tender for the Bulim contract, of which eight out of the 11 tenders were shortlisted. SMRT and CDG’s (through its 75% owned SBS Transit) tenders were both shortlisted, with SMRT’s bid 25.2% lower than SBS Transit’s bid, which was the second lowest shortlisted bid. Market became concerned that if SMRT had won the tender, it could put downward pressures on the contract fees for the remaining 10 bus packages. More recently on 8 May, LTA awarded the Bulim contract to TTG at an amount that is 18.7% higher than SMRT’s bid, which provides relief over this concern, especially when the remaining nine packages (~80% of Singapore’s total bus fleet) are to remain with the incumbents, SMRT and CDG, until 2021. We are encouraged seeing good progress on the transition to GCM as well as relief over bus operating margin.

Maintain OVERWEIGHT
In the near-term, we expect both PTOs’ fare business to grow on higher ridership and average fares. CDG is expected to continue its stable growth momentum but note that SMRT is likely to see higher operating expenses in the near-term on reasons mentioned above but mitigated by higher rental income. We believe the catalysts driven by regulatory changes will positively change the earnings profile of both PTOs. Hence, we maintain OVERWEIGHT on land transport sector. Given the current share prices, our top pick is still SMRT [BUY; FV: S$1.85] and we think CDG [HOLD; FV: S$3.07] is fairly priced for now.

ComfortDelGro

OCBC on 14 May 2015

As first quarter’s performance had historically always been the weakest, ComfortDelGro’s (CDG) 1Q15 results were broadly in-line with our expectations as PATMI grew 6.8% YoY to S$67.6m, which formed 22.1% of our FY15 forecast. This was on the back of a 1.3% growth in revenue to S$963.5m, driven mainly by Bus (+2.2%), Rail (+8.1%) and Taxi (+5.2%) segments. Going forward, we expect stable growth to continue as management guided for revenue from Singapore and UK bus, rail and Singapore taxi segments to increase. Over the longer-term, bus restructuring in Singapore will turn core operations profitable from 2H16 onwards. We continue to like CDG for its stability and diversified revenue base. Prudent capital management coupled with steady growth prospects are attractive to us. With in-line 1Q15 results, we keep our forecasts unchanged. Maintain HOLD with an unchanged FV of S$3.07.

Decent start to FY15
As first quarter’s performance had historically been the weakest, ComfortDelGro’s (CDG) 1Q15 results were broadly in-line with our expectations as PATMI grew 6.8% YoY to S$67.6m, which formed 22.1% of our FY15 forecast. This was on the back of a 1.3% growth in revenue to S$963.5m, driven mainly by Bus (+2.2%), Rail (+8.1%) and Taxi (+5.2%) segments but eroded by weaker AUD and GBP. 1Q15 operating expenses grew 1.3% YoY to S$860.4m mainly due to higher staff costs (+5.5%) and higher depreciation and amortisation (+8.1%) but offset by lower fuel and electricity costs (-10.6%) and lower insurance premiums and accident claims (-12.5%). Favourable foreign currency translation of S$7.9m also helped mitigate the increase in operating expenses. For 1Q15, revenue from overseas decreased 1.3ppt YoY to form 38.3% of group’s total revenue while overseas operating profit declined 5.5ppt to form 45.3% of group’s total operating profit.

Stability remains its key characteristic
Going forward, we expect stable growth to continue as management guided for revenue from Singapore and UK bus, rail and Singapore taxi segments to increase. Bus segment growth is still driven by: 1) higher ridership and fares in Singapore, and 2) new routes that started in 1Q15 as well as contract enhancements in the UK. As more trains are added to the North-east Line in FY15, ridership is expected to increase, together with higher fares from the fare adjustment. The Singapore taxi business is expected to grow with more cashless transactions and continuation of fleet renewal in 2015. Over the longer-term, bus restructuring in Singapore will turn core operations profitable from 2H16 onwards. With DTL 2 (12 stations) expected to start from 1Q16 and DTL 3 (16 stations) from 2017 onwards, we can expect further growth in revenue though offset by initial start-up costs.

Forecasts unchanged; maintain HOLD
We continue to like CDG for its stability and diversified revenue base. Prudent capital management coupled with steady growth prospects is attractive to us. With in-line 1Q15 results, we keep our forecasts unchanged. Maintain HOLD with an unchanged FV of S$3.07.

ComfortDelGro

UOBKayhian on 14 May 2015

FY15F PE (x): 14.9
FY16F PE (x): 16.2

1Q15 net profit was slightly below expectations, at 21% and 21.5% of our and consensus full-year estimates respectively due to lower revenue contribution from the UK/Ireland and Australia bus operations. ComfortDelgro’s (CD) revenue and net profit improved 1.3% and 6.8% yoy respectively as net margin edged up 0.3ppt. Maintain HOLD with a DCF-based target price of S$3.31 (from S$3.30). While fundamentals remain promising, we note that much of the attractiveness has been priced in after a 15% ytd rise in share price. CD is currently trading at 21x 2015F PE, close to its +2SD of 23x PE. Entry price is S$2.90.

Land Transport

OCBC on 11 May 2015

LTA last Friday awarded the contract for Singapore’s first bus package to London-based Tower Transit Group Limited. Recall that TTG’s bid was the third lowest as the incumbents, ComfortDelGro (CDG) and SMRT, were the only ones that put in lower bids than it did. As LTA had stated right from the start that the evaluation process will be based on both quality and price factors, the incumbents not winning the package did not come as a surprise to us. Previously, we reiterated our view that even if the incumbents lost all three bus packages released or to be released for competitive tenders, or that SMRT wins the low bid put in, the net impact from this transition to the new bus government contracting model (GCM) remains positive. The incumbents are likely to benefit from the nine bus packages, which we expect operations to turn profitable on positive margin. Hence, we maintain OVERWEIGHT on the land transport sector, as we reiterate BUY on SMRT [FV: S$1.85] and HOLD on CDG [FV: S$3.07].

Tower Transit Group put in third lowest bid
Singapore Land Transport Authority (LTA) last Friday awarded the contract for Singapore’s first bus package to London-based Tower Transit Group Limited (TTG - refer to page 2 for company details). Recall that TTG’s bid was the third lowest as the incumbents, ComfortDelGro (CDG) and SMRT, were the only ones that put in lower bids than it did. As LTA had stated right from the start that the evaluation process will be based on both quality and price factors, the incumbents not winning the package did not come as a surprise to us. Commencing from 2Q16, the five-year contract will see TTG operates the new Bulim bus depot and 26 bus services from three bus interchanges. TTG will get an estimated total fee of S$556.0m over the contract period, and this excludes any adjustments for inflation, changes in wage levels and fuel costs, service variation and incentive payment.

Net impact of GCM remains positive for incumbents
Previously, we reiterated our view that even if the incumbents (i.e. CDG through its 75% owned SBS Transit and SMRT) do not win all three bus packages to be released for competitive tenders, or that SMRT wins the low bid put in, the net impact from this transition to the new bus government contracting model (GCM) remains positive. Looking at the bigger picture, both incumbents are currently still incurring losses from core bus operations (i.e. negative operating margin) and with the remaining nine packages to remain with the incumbents until 2021, the transition to GCM will see bus operations for both CDG and SMRT turn profitable from 2H16. Hence, in our view, losing these three bus packages was never a concern.

Furthermore, with LTA using the tenders of the first three packages as a price-discovery mechanism, we are encouraged by the first tender outcome. We think it will certainly alleviate the market concern over SMRT’s low bid of potentially driving down the benchmark used by LTA to negotiate with the incumbents for the contract fees of the remaining nine bus packages. Hence, given that the study done by LTA is largely based on the London bus operating model, our assumptions for bus operating margin is still in the region of 7-9% under the GCM which is likely to commence in 2H16 for the incumbents.

Maintain OVERWEIGHT
In light of the outcome of the first bus package, we remain positive on the sector outlook as regulatory changes continue to take place. The incumbents are likely to benefit from the nine bus packages, which we expect operations to turn profitable on positive margin. Hence, we maintain OVERWEIGHT on the land transport sector, as we reiterate BUY on SMRT [FV: S$1.85] and HOLD on CDG [FV: S$3.07]. Also, our forecasts are on the conservative side as we previously assumed that the incumbents do not win any of the first three packages.

Land Transport

OCBC on 12 Mar 2015

The two public transport operators (PTOs) in Singapore, ComfortDelGro (CDG) and SMRT Corp (SMRT) had a smooth end to CY14, as results came in within expectations. CDG’s FY14 revenue rose 8.1% while PATMI grew 7.7%. For SMRT, recovery momentum continues on as 3QFY15 PATMI jumped 58.4% YoY as revenue rose 6.8% on both non-fare and fare businesses recorded broad-based growth. Going forward, we have reasons to believe that the sector outlook remains positive on several catalysts, both near-term and longer-term. Overall, the expected increase in ridership in addition to the catalysts stated above will continue to drive growth. We believe PTOs will also continue to manage costs and improve productivity gains, improving profitability further. Hence, we maintain OVERWEIGHT on land transport sector. However, given the recent run-up in CDG’s share price, our top pick for the land transport sector is now SMRT as we reiterate BUY on SMRT [FV: S$1.85] while we maintain HOLD [FV: S$3.07] on CDG.

Review of CY14 results 
The two public transport operators (PTOs) in Singapore, ComfortDelGro (CDG) and SMRT Corp (SMRT) had a smooth end to CY14, as results came in within expectations. CDG’s FY14 revenue rose 8.1% while PATMI grew 7.7%. Its PATMI formed 98.5% of our projection as it continued to achieve broad-based revenue growth across bus, rail and taxi segments. Business stability remains as CDG’s key characteristic but we note that there are other growth drivers going forward as well. For SMRT, recovery momentum continues on as 3QFY15 PATMI jumped 58.4% YoY as revenue rose 6.8% on both non-fare and fare businesses recorded broad-based growth. Its operating margins also improved YoY for the fourth consecutive quarters as 9MFY15 PATMI formed 76.5% of our projection. Similarly, we think SMRT has much more room to grow in view of the several catalysts we have identified.

Outlook remains positive on several catalysts
Going forward, we have reasons to believe that the sector outlook remains largely positive on several catalysts. On near-term catalysts, we expect: 1) further growth for CDG’s taxi segment as it is the only taxi operator in Singapore allowed to grow its fleet size by 2.0% in CY15, 2) higher taxi rental income for both PTOs in CY15 as they continue to renew their taxi fleet, 3) full rental income contribution from SMRT’s Kallang Wave Mall from FY16 onwards, and lastly, 4) savings from lower energy costs that will be more visible from FY16 for both PTOs with different hedging exposures. The longer-term catalysts are still the same from our last sector report: 5) with a little more than a year before the new bus government contracting model (GCM) commences, LTA has to take over all the bus assets from the PTOs and we believe both PTOs have much to gain if LTA pays in lump sum to purchase the bus assets, 6) the transition to the new GCM by 2HCY16 will see core bus operations of both PTOs turn profitable, and 7) the announcement of concrete details on new rail financing model, that has limited impact on CDG but large positive impact on SMRT.

Maintain OVERWEIGHT
Overall, the expected increase in ridership in addition to the catalysts stated above will continue to drive growth. We believe PTOs will also continue to manage costs and improve productivity gains, improving profitability further. Hence, we maintainOVERWEIGHT on land transport sector. However, given the recent run-up in CDG’s share price, our top pick for the land transport sector is now SMRT as we reiterate BUY on SMRT [FV: S$1.85] while we maintain HOLD [FV: S$3.07] on CDG. However, note that we have also taken into account the potential fines and higher expenses resulting from the series of train disruptions on SMRT services thus far in CY15.

ComfortDelGro Corporation

UOBKayhian on 13 Feb 2015

FY15F PE (x): 20.8
FY16F PE (x): 19.3

Earnings in line with expectations. ComfortDelgro’s (CD) 2014 net profit of S$283.5m improved 7.7% yoy and was in line with our full-year forecast of S$282m. Growth was broad-based across most key sectors. Core business segments have all improved with bus, rail and taxi revenue growing 10.6%, 19.5% and 6.9% respectively yoy. Notably, revenue from the rail segment improved markedly as average daily rail ridership and average fare increased 18.3% and 3.2% respectively. Looking forward to another good year. CD is likely to continue its stellar performance going into 2015. First, rail and bus ridership has risen. Based on our estimates, 2014 daily average rail and bus ridership increased 18.3% and 5.2% yoy respectively. We expect ridership growth to be supported by the government’s pro-population policies and measures to discourage private vehicle ownership. Second, the Implementation of a 2.8% fare hike from Apr 15 is expected to alleviate operating cost pressure and improve operating margins. Third, the ability to increase taxi market share in Singapore. CD was the only taxi company which adheres to the Taxi Availability Framework and hence will be the only group allowed to grow its taxi fleet by 2% in 2015. Downgrade to HOLD with a DCF-based target price of S$3.31 (previously S$3.08). While fundamentals remain promising, we note that much of the attractiveness has been priced in after a 20% ytd rise. In addition, CD currently trades at 21x 2015F PE, which is close to its +2SD of 23x.

ComfortDelGro

OCBC on 12 Feb 2015

ComfortDelGro’s (CDG) FY14 results were broadly in-line with expectations as PATMI grew 7.7% YoY to S$283.5m on the back of an 8.1% increase in revenue to S$4.1b. As expected, YoY revenue growth was mainly driven by CDG’s Bus (+10.4%), Rail (+19.5%) and Taxi (+7.2%) segments. Operating expenses grew 8.7% YoY to S$3.6b mainly due to rising staff costs (+11.7%), higher contract services (+10.0%) and higher fuel and electricity costs (+14.8%). Consequently, CDG’s FY14 PATMI is largely within expectations as it formed 98.5% of consensus and our forecasts. We believe CDG will continue to see strong growth as management guided for revenue from bus, rail and Singapore taxi segments to increase going forward. CDG has been our top pick since Dec-14 with a BUY rating, which had been spot on thus far. While we still like CDG for its diversified revenue base and growth prospects, we think the recent bullish run in its share price is overdone. Hence, given its outlook, we increase our DDM-derived FV from S$3.03 to S$3.07. Downgrade to HOLD on valuation grounds.

FY14 earnings largely in-line with expectations
ComfortDelGro’s (CDG) FY14 results were broadly in-line with expectations as PATMI grew 7.7% YoY to S$283.5m on the back of an 8.1% increase in revenue to S$4.1b. As expected, YoY revenue growth was mainly driven by CDG’s Bus (+10.4%), Rail (+19.5%) and Taxi (+7.2%) segments. Operating expenses grew 8.7% YoY to S$3.6b mainly due to rising staff costs (+11.7%), higher contract services (+10.0%) and higher fuel and electricity costs (+14.8%). Consequently, CDG’s FY14 PATMI is largely within expectations as it formed 98.5% of consensus and our forecasts. FY14 revenue from overseas grew 0.3ppt YoY to form 40.8% of group’s total revenue while operating profit declined 0.3ppt to form 48.6% of group’s total operating profit.

Growth in key business segments still relatively strong
We believe CDG will continue to see strong growth as management guided for revenue from bus, rail and Singapore taxi segments to increase going forward. Bus segment growth is driven by: 1) ridership increase and the 2.1% net fare increase from Apr-15 (after contribution to public transport fund) in Singapore, 2) full-year contribution from Australia’s Blue Mountains Bus Company acquired in Aug-14, and 3) contract enhancements in UK. Similarly, Singapore rail business is expected to be higher from higher ridership and the same fare increase. Singapore taxi business is expected to grow with more cashless transactions and replacement of taxis in 2015. For longer-term growth, with the current core bus operations still in loss position, we believe the new bus contracting model commencing in 2H16 will turn core bus operations positive. Also, we expect contributions from DTL 2 (12 stations) and DTL 3 (16 stations) to come in with revenue services expected to commence as scheduled from 1Q2016 and 2017 onwards, respectively.

Top-pick since Dec-14; downgrade to HOLD on valuation grounds
CDG has been our top pick since Dec-14 with a BUY rating, which had been spot on thus far. While we still like CDG for its diversified revenue base and growth prospects, we think the recent bullish run in its share price is overdone. Hence, given its outlook, we increase our DDM-derived FV from S$3.03 to S$3.07. Downgrade to HOLD on valuation grounds

Singapore Land Transport

Kim Eng on 22 Jan 2015

• Fare hike of 2.8% for rail & bus rides largely within expectations. Together with cheaper oil, could provide some relief to operators’ bottom lines.
• Land Transport not good mid-term proxy for oil-price movements because of fare-adjustment formula. Fares could be lowered by 1% next year.
• Remain Neutral on sector.

2.8% fare hike from Apr 2015
The Public Transport Council has announced a fare hike of 2.8% for bus and MRT rides from 5 Apr 2015. It arrived at this based on a 0.6% contraction in the sector’s fare-formula output plus a positive 3.4% carried over from its previous year’s exercise. Singapore’s two public-transport operators are also required to contribute a combined SGD13.5m to the Public Transport Fund: SGD5.5m from SBST (Not Rated) and SGD8.0m from SMRT. The money will be used for the needy. With a fare revenue pool of SGD1.7b pa, this fare hike will translate into higher gross revenue of SGD48.5m for the sector. It implies net benefits of SGD35m, SGD16.4m accruing to SBST and SGD18.6m to SMRT.

No surprise, limited reprieve
The quantum of the hike was expected, having been flagged by Transport Minister, Lui Tuck Yew, during a recent parliamentary reply. Allied with lower oil prices, this hike should provide some near-term margin relief for operators. However, we do not think Land Transport is a good proxy for oilprice movements in the medium term. This is because the sector’s fare-adjustment formula^ already takes into account changes in energy prices. In fact, in the same parliamentary reply, Minister Lui signalled that fares could be reduced by 1% in the next review.

This could mute benefits for the operators.
Remain Neutral on the sector.
^Fare adj. formula = 0.4*cCPI + 0.4*WI + 0.2*EI – 0.5%.
cCPI= Core Consumer Price Index, WI= Wage Index, EI= Energy
Index.

Land Transport Sector

OCBC on 3 Dec 2014

The journey for Singapore’s Public Transport Operators (PTOs), namely ComfortDelGro Corporation Limited (CDG) and SMRT Corporation Limited (SMRT), has been smooth thus far in 2014. CDG showed stable growth while SMRT exceeded expectations for all three quarters to date for the year. Looking at the fundamental factors for the growth and improvements in operating margins, we believe both CDG and SMRT are on track to meet our 4QCY14 projections. We believe the momentum seen in 2014 will sustain into 2015 based on both near-term and longer-term factors. However, the key idea to take note is the potential increase in Singapore’s bus and rail fares in 2015. Coupled with the continued efforts put in by the PTOs to manage costs and increase productivity gains, we think the outlook for the PTOs remains positive going into 2015, as we think profitability will improve further. Hence, we maintain OVERWEIGHT on land transport sector, while reiterating BUY rating on both CDG (FV: S$3.03) and SMRT (FV: S$1.70).

PTOs to end 2014 with a smooth ride
The journey for Singapore’s Public Transport Operators (PTOs), namely ComfortDelGro Corporation Limited (CDG) and SMRT Corporation Limited (SMRT), has been smooth thus far in 2014, at least based on what we saw from their first three quarters’ results. CDG continued to show stable growth as its results for all three quarters of 2014 came in within our expectations. 9M14 PATMI grew 8.1% YoY on higher revenue. Its operating margins for 1Q14 through 3Q14 remained stable between 10% and 12% as labour expenses stabilized at ~33% of total revenue. Separately, 2014 had been a year full of pleasant surprises from SMRT as its results for all three quarters for the year exceeded our expectations. After six consecutive quarters of operating losses, fare business finally turned profitable driven by higher ridership and higher average fares in 2QFY15 (3QCY14). The key factors for profitability were disciplined cost management, productivity gains as well as lower electricity and diesel costs, which boosted overall operating margins from 7.6% in 4QFY14 (1QCY14) to 10.6% in 2QFY15. In all, we believe both CDG and SMRT are on track to meet our 4QCY14 projections.

Several factors to sustain momentum in 2015
We believe the momentum seen in 2014 will sustain into 2015 based on both near-term and longer-term factors. The potential near-term catalysts are: 1) the high likelihood that the Public Transport Council (PTC) will grant further fare increase in 2015, 2) lower energy prices which will benefit SMRT more, 3) ridership growth expected to improve, and 4) CDG to benefit from higher growth in taxi rental income as it is the only taxi operator in Singapore allowed to grow its taxi fleet by 1% in 1H15. The longer-term factors are: 1) the announcement of concrete details on the new rail financing model, and 2) the shift of bus operating model to the new bus government contracting model. Note that the impact of the new rail financing framework will have minimal impact on CDG since SBS Transit already does not own any train assets. Under the new bus government contracting model, we expect core bus operations for CDG and SMRT to turn profitable, but CDG is expected to experience more positive impact as it has 75% market share of the bus operations in Singapore.

Maintain OVERWEIGHT
Overall, the expected fare increase along with increasing ridership will continue to drive growth while lower energy prices will further help ease increasing costs pressures. Coupled with the continued efforts put in by the PTOs to manage costs and increase productivity gains, we think the outlook for the PTOs remains positive going into 2015, as we think profitability will improve further. Hence, we maintainOVERWEIGHT on land transport sector, while reiterating BUY rating on both CDG (FV: S$3.03) and SMRT (FV: S$1.70).

ComfortDelgro

OCBC on 27 Nov 2014

Stability is ComfortDelGro’s (CDG) key strength thus far for FY14 and we think its ability to remain so is attractive. CDG’s results for all three quarters in FY14 came in within our expectations and we believe it is on track to meet our forecasted 9.0% YoY growth for FY14’s PATMI. CDG’s key growth drivers are its bus, rail and taxi segments and we believe these will remain strong going into 2015. For bus and rail operations in Singapore, the potential catalyst could come from a fare increase in 2015. We continue to like CDG for its diversified yet stable revenue streams from different geographical regions. With a healthy balance sheet, we expect stable and decent dividends (~55% payout) ahead. Hence, we reiterate our BUY rating on CDG with an unchanged FV estimate of S$3.03.

FY14 performance likely to meet our expectations
Stability is ComfortDelGro’s (CDG) key strength thus far for FY14 and we think its ability to remain so is attractive. CDG’s results for all three quarters in FY14 came in within our expectations and we believe it is on track to meet our forecasted 9.0% YoY growth for FY14’s PATMI. Recall that revenue from Australia saw decline since 1Q14 on loss of bus routes in regions 1 and 3. However, we believe it is more or less stabilized as seen in 3Q14 from its operations in the newly acquired region 4 bus routes. In UK, revenue growth came mainly from the newly secured Metroline West operations. We also expect improvement from bus and rail operations in Singapore to continue on higher ridership and average fares for the rest of FY14. Overall, we are positive on CDG’s ability to meet our FY14 expectations.

2015 outlook remains bright for ComfortDelGro
CDG’s key growth drivers are its bus, rail and taxi segments and we believe they will remain strong going into 2015. Although Australia saw decline in FY14, we think revenue has stabilized and should see gradual growth in 2015. We expect revenue from UK bus operations to increase steadily from Metroline West growth. For bus and rail operations in Singapore, the potential catalyst could come from a fare increase in 2015. The Public Transport Council (PTC) has started the annual fare review exercise with a decision likely to be announced in 1Q15. The last fare increase of 3.2% was in Apr 2014, which is less than half the total fare cap of 6.6%. Hence, we expect the remaining 3.4% in this year’s fare review exercise and based on the new formula used for deciding fare adjustment, we estimate the increase is likely to be lower than 3.4% due to the recent oil prices’ slide. Taxi revenue in Singapore should also continue to see growth on higher rental income as a result of fleet renewal.

Reiterate BUY rating
We continue to like CDG for its diversified yet stable revenue streams from different geographical regions. With a healthy balance sheet, we expect stable and decent dividends (~55% payout) ahead. Hence, we reiterate our BUY rating on CDG with an unchanged DDM-derived fair value estimate of S$3.03.

ComfortDelGro

OCBC on 14 Nov 2014

ComfortDelGro’s (CDG) 3Q14 results were largely in-line with our expectations. PATMI grew 5.3% YoY to S$80.8m on the back of a 6.0% increase in revenue to S$1,037.3m. Top line growth was mainly driven by Bus (+4.9%), Rail (+21.4%) and Taxi (+7.9%) segments. For 9M14, CDG’s revenue and PATMI rose 9.0% and 8.1% YoY to S$3,004.4m and S$219.8m, forming 75.9% and 78.2% of our FY14 projections, respectively. Outlook remains relatively stable with Singapore and UK Bus segment as well as Singapore Taxi segment expected to drive revenue growth. While we think CDG’s 3Q14 results are largely in-line with expectations, we adjust our FY14 PATMI forecast upwards by 2.2% to factor in the outlook guidance from management. Consequently, our DDM-derived fair value estimate increases from S$2.92 to S$3.03, maintain BUY.

9M14 PATMI formed 78% of our FY14 projections
ComfortDelGro’s (CDG) 3Q14 results were largely in-line with our expectations. PATMI grew 5.3% YoY to S$80.8m on the back of a 6.0% increase in revenue to S$1,037.3m. Top line growth was mainly driven by the Bus (+4.9%), Rail (+21.4%) and Taxi (+7.9%) segments. However, Bus revenue growth in UK (+12.4%) and Singapore (+11.5%) were offset by a decline from Australia (-17.3%) due to loss of Regions 1 and 3 operations. The Rail segment saw increase in average daily ridership from both North-East Line (NEL) and Downtown Line (DTL), further boosted by higher average fares. For 9M14, CDG’s revenue and PATMI rose 9.0% and 8.1% YoY to S$3,004.4m and S$219.8m, forming 75.9% and 78.2% of our FY14 projections, respectively. For the past four fiscal years, 4Q had traditionally been the weaker quarter and hence, we view 9M14 PATMI meeting 78.2% of our FY14 projections to be largely in-line.

Bus, Rail and Taxi segments likely to remain as revenue drivers
For the larger contributors, CDG’s management guided for revenue from Singapore’s bus, rail and taxi segment as well as the UK’s bus segment to increase. Singapore’s bus segment is likely to see increasing ridership and average fares but also higher staff salaries while contribution from Metroline West in the UK is the key driver for UK bus revenue growth. On the other hand, Automotive Engineering Services (AES) and Australia’s bus segment are likely to see decreases. Australia’s decline is mainly due to the loss of regions 1 and 3 and the slightly lower margin seen in region 4 while the drop in AES segment will largely be due to lower diesel sales. While Taxi revenue in Singapore is expected to increase due to fleet renewal commanding higher rental income, taxi revenues from other countries are expected to be maintained.

Increase FV; maintain BUY
While we think CDG’s 3Q14 results are largely in-line with expectations, we adjust our FY14 and FY15 PATMI forecasts upwards by 2.2% and 4.0% respectively to factor in the outlook guidance from management. Consequently, our DDM-derived fair value estimate increases from S$2.92 to S$3.03, maintain BUY.

ComfortDelgro

OCBC on 30 Sep 2014

Singapore Transport Minister Lui Tuck Yew announced on 29-Sep that the Downtown Line 2 (DTL 2) will be opened in 1Q16, a few months ahead of schedule. The original schedule was delayed from end-2015 to mid-2016 after one of its main contractors went into insolvency last year. We estimate CDG to breakeven on its start-up costs between phase 2 and phase 3 of the whole DTL project and we believe the shortened delay would also logically allow CDG to breakeven earlier as well. In addition, we expect ridership to improve considerably when DTL 2 opens with 12 stations, including four interchange stations, which improves connectivity significantly. Furthermore, we expect the higher margins advertisement and rental business segment to boost revenue and profitability as well. With the impact of DTL already factored in our financial model previously, we retain our forecasts and maintain BUY with an unchanged fair value estimate of S$2.92.

Good news on DTL 2’s schedule
Singapore Transport Minister Lui Tuck Yew announced on 29-Sep that the Downtown Line 2 (DTL 2) mass rapid transit (MRT) line will be opened in 1Q16, a few months ahead of schedule. The original schedule was delayed from end-2015 to mid-2016 after one of its main contractors, Alpine Bau, went into insolvency last year. He added that additional manpower as well as innovative work processes helped accelerate the project and all the contractors will continue to do so in a bid to try to bring forward the opening to even earlier than 1Q16.

Expect DTL project to breakeven earlier
As at 2QFY14, CDG recorded loss of S$6.2m from its Downtown Line 1 (DTL 1) operations but we estimate CDG to breakeven on its start-up costs in the period between phase 2 and phase 3 of the whole DTL project. With the opening of DTL 2 brought forward by a few months and possibly even earlier, we believe this is good for CDG as this would also logically allow it to breakeven earlier as well. Beyond its breakeven point, we expect CDG to be able to cover the licensing fee charged by LTA through revenue generated from DTL and hence see meaningful income contribution. Furthermore, we believe ridership will improve significantly given that the DTL 2 comprises 12 stations and one depot, including four interchange stations, where we expect traffic flow to increase considerably. We also believe the advertisement and rental business segments, which offer higher margins, to further boost revenue and profitability.

Maintain BUY
With the impact of DTL already factored in our financial model previously, we retain our forecasts since the opening of DTL 2 continues to be in FY16. Although the estimated total licensing fee of ~S$1.6b over the 19-year operating lease should have started in 2013 when DTL 1 commenced, we expect to see significant increase only upon opening of the full DTL in 2017 since the variable component of the fee depends on ridership. With the slight retreat in share price since our last update in Aug-14, we maintain BUY with an unchanged fair value estimate of S$2.92.

ComfortDelGro

OCBC on 14 Aug 2014

ComfortDelGro (CDG) reported 2Q14 results which were within our expectations. PATMI rose 9.9% YoY to S$75.7m on the back of a 11.9% jump in revenue to S$1,016.3m. Its overseas operations continued to be its main growth driver. An interim dividend of 3.75 S cents/share was declared, higher than the 3 S cents/share declared in 1H13. With the exception of CDG’s Australia bus business which is expected to register a decline in revenue, management guided that its remaining business segments are expected to either maintain or increase their revenue ahead. We retain our forecasts given this set of in-line results. However, we increase our terminal growth rate assumption from 2% to 2.5% to take into account the more robust and sustainable long-term prospects of the bus industry in Singapore. Our DDM-derived fair value estimate is raised from S$2.56 to S$2.92. Maintain BUY on CDG.

2Q14 results within expectations
ComfortDelGro (CDG) reported 2Q14 results which were within our expectations. PATMI rose 9.9% YoY to S$75.7m on the back of a 11.9% jump in revenue to S$1,016.3m. The latter was underpinned by solid double-digit growth in its Bus (+18.4%) and Rail (+20.8%) segments. Although CDG continued to face challenging conditions in Singapore as it registered core operating losses in its bus and train operations (excluding advertising and rental income) amounting to S$3.6m, this was offset by positive growth in its overseas businesses. Its overseas operations constituted 50.7% of its 2Q14 operating profit although revenue contribution was only 41.2%. For 1H14, CDG’s revenue and PATMI increased by 10.6% and 9.8% to S$1,967.1m and S$139.0m, forming 49.7% and 49.5% of our FY14 forecasts, respectively. An interim dividend of 3.75 S cents/share was declared, an improvement from the 3 S cents/share declared in 1H13. This would be paid on 28 Aug. 

Most segments to see stable or positive revenue growth
CDG guided that the revenue for its Bus Station, Inspection & Testing Services, Car Rental and Leasing, and UK, Australia and Vietnam Taxi operations are expected to be maintained. With the exception of its Australia Bus business which is expected to record a decline in revenue, all other segments are expected to contribute positively to its topline. 

Maintain BUY
We retain our forecasts given this set of in-line results. However, we increase our terminal growth rate assumption from 2% to 2.5% to take into account the more robust and sustainable long-term prospects of the bus industry in Singapore, given the transition to a “Government gross cost contracting model”. Although there would be increased competition from the tendering process, we believe CDG’s extensive market knowledge and experience would enable it to maintain its dominant market share. Our DDM-derived fair value estimate is raised from S$2.56 to S$2.92. Maintain BUY.

ComfortDelGro

UobKayhian on 14 Aug 2014

FY14F PE (x): 19.4
FY15F PE (x): 18.3
1H14 net profit of S$139m (+10% yoy) was in line with expectations. We see potential
further upside from a restructuring of the railway asset model and accretion from its
M&A. Growth prospects are moderate but cashflow generation is high.
A core holding in land transport. Maintain BUY on CD with a DCF-based target price of
S$2.83 (previously S$2.30). The increase is to reflect a terminal growth of 3%
compared with our previous assumption of 1%. At our target price, the implied 2015F
PE of 20.2x is close to its +1SD P valuation but we believe this is deserved given its
strong earnings track record and cashflow.

ComfortDelgro

Kim Eng on 14 Aug 2014

• 2Q14 net income of SGD75.7m (+9.9% YoY) in line. Strong Singapore taxi, UK bus and rail performances.
• Interim DPS raised 25% to 3.75 SGD cts, reflecting better profitability and payout.
• 30% YTD rally priced in positives. Downgrade to HOLD from BUY with unchanged TP of SGD2.50 (18x FY15E P/E).

Strong 2Q in line
2Q14 net income of SGD75.7m (+9.9% YoY) met expectations. 1H14 net formed 50% of our FY14E forecast. Taxi operations in Singapore continued to benefit from ongoing fleet renewal. Its new i40s are commanding higher rental rates. Taxi bookings in Singapore do not seem to have been affected by the growing popularity of third-party apps, as volume rose 10% YoY. UK bus operations booked much better profits with the aid of its newly acquired Metroline West. Rail operations were also better as revenue generated by Downtown Line (DTL) of SGD4.5m buffered losses even as start-up costs stabilised. Interim DPS raised by 25% to 3.75 SGD cts (FY13 interim: 3.0 SGD cts), reflecting better profitability and a higher payout of 57.6%.

Upside from bus transition priced in
CDG’s strong results underscore its solid fundamentals. Singapore earnings should continue to improve on a better bus performance after transition, the phased opening of DTL and taxi fleet renewal. Overseas should be driven mainly by acquisitions.
However, we believe its 30% YTD rally has more than priced in this rosy outlook. Our TP is unchanged at SGD2.50, pegged to 18x FY15E P/E, 1SD above its 10-year mean. This is justified by positives from Singapore’s bus-model transition. Downgrade to HOLD from BUY.

Land Transport

Maybank Kim Eng Research, May 22

THE Land Transport Authority (LTA) yesterday announced restructuring of the public bus industry to a "government contracting model" which will be phased in starting from H2 2014. The restructuring will raise service standards by increasing competition. Key points under the new regime: 1) competitive tendering, 2) government owns all assets, and 3) each of the 12 packages of routes will be on a five-year contract.

Details of this transition are broadly in-line with our expectations. However, the latest announcement for the government to own all bus assets is a positive development, in our view, as it relieves the operators of future cash outlays for the purchase of operating assets. Assuming that bus assets worth approximately S$200 million and S$850 million on SMRT's and ComfortDelGro's (CDG) respective balance sheets are sold to LTA at book value, their debt levels would improve significantly with the latter ending up with a net cash position of around S$1 billion. Losses at their respective bus segments will also reverse, resulting in a meaningful earnings uplift.

Following this news, the market will now focus on the rail transition. If LTA decides to purchase rail assets at book value, SMRT could receive S$800 million cash. However, as highlighted in an earlier report, transition for the rail business model is far more complicated due to the challenging process of unwinding contractual agreements under the old regime. In particular, the treatment of existing asset purchase obligations in the transition process and future licensing charge are key details that remain lacking. Furthermore, unlike the bus licences, which will expire in 2016, majority of rail lines are contracted under the old regime to beyond 2019.

We believe that the market will look to price both SMRT and CDG based on a "sustainable level of earnings". We use our existing 2016 estimate forecasts as the basis of adjustment to estimate a sustainable level of earnings. Consequently, we raise our target prices for SMRT and CDG to S$0.80 and S$2.50 respectively, based on 15 times PE. Our "sell" rating on SMRT and "buy" rating on CDG remain intact. Given the positive sector development, we raise our rating to "neutral" (from "underweight").

Sector - NEUTRAL