ComfortDelgro - Maintain HOLD, and fair value estimate of S$1.37

ComfortDelGro Corp announced their first quarter results ended 31 March 2009. Group revenue fell by 4.4% from S$749.6 mil in 1Q08 to S$716.6 mil for 1Q09 due to a negative translation from a weaker Sterling Pound and Australian Dollar of S$50.1 mil. Without this translation loss, revenue would have risen by 2.3% to S$766.7 mil. Operating expenses declined 5.7% from S$673.4 mil in 1Q08 to S$635.1 mil due mainly to receipt of the Jobs Credit in Singapore, decrease in the cost of diesel purchased for resale to the Group’s taxi drivers and a reduction in fuel and electricity costs. The Group’s operating profit increased by 7.0% or S$5.3 mil from S$76.2 mil in 1Q08 to S$81.5 mil for 1Q09. Operating profit would have been higher at S$84.7 mil if not for the negative foreign currency translation of S$3.2 mil.

Business segment review. Bus business at Group level decreased by 8.6% to S$347.9 mil where the adverse impact of the decline in the Sterling Pound and Australian Dollar more than offset the gains in revenue from these two countries. The China bus business did continue to grow in revenue and ridership coupled with a stronger Renminbi leading to a translation gain of S$1.6 million. Singapore’s bus business saw a decline of 0.4% to S$142.2 mil as average daily bus ridership fell marginally by 0.3%.

Taxi. Although the taxi business in Singapore and China did increase, it was insufficient to mitigate the decline in the Group’s UK taxi business leading to an overall decline of 2.3% to S$225.4 mil. Due to the economic downturn, the Group saw a drop in corporate bookings of S$8.7 million leading to revenue from the UK taxi business decreasing by 33.6% to S$38.1 mil.

Rail. The rail business saw average daily ridership for both the North East Line and the LRTs increasing by 8.3% and 7.6% respectively. Revenue from rail increased 10.5% toS$27.4 million. Including rental and advertising income, total revenue from the rail business grew by 12.0% toS$29.9 million for 1Q09. Vehicle Inspection and Testing Services. This segment saw growth of 9.6% to S$19.6 million mainly from an increase in the number of vehicles inspected as well as an increase in the number of projects completed by Setsco Services Pte Ltd. Bus Station. The bus station business under Guangzhou Xin Tian Wei increased by 15.4% to S$6.0 mil for the quarter due to a rise in the number of passengers using the station.

Maintain HOLD, and fair value estimate of S$1.37. ComfortDelgro Corp is currently operating in a challenging environment. We expect its UK bus and especially the taxi business segment to continue its downward trend. Bus operations in Singapore might also be affected given the fare reduction exercise and the increase in transfer rebate. As mentioned in our initiation report, we will continue to watch the unfolding of 1) centralized bus planning, 2) bidding for rights to operate the Downtown Line, and 3) further information on CD’s growth strategy in China and Australia to determine the ongoing validity of our valuation and recommendation.

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