ComfortDelGro: Lower energy costs boosted margins

2Q09 results in-line with expectations. ComfortDelGro registered 2Q09 PATMI of SGD57.3m, up 0.9% YoY (+9.1% QoQ). 1H09 PATMI of S$109.8m was 49.3% of our full year forecast of S$222.8m (consensus S$219.4m). Revenue fell by 4.0% YoY to S$758.3m due to the negative translation effect of the weaker £ and A$. Excluding the translation effect, revenue would have risen by 0.3% to S$792.5m. Operating profit surged 81.7% YoY to S$94.5m due largely to a sharp fall in operating expenses led chiefly by a drop in fuel and electricity costs. Maintain BUY with a DCF-derived target price of S$1.78, based on a 6.9% WACC and 3% terminal growth rate.

Lower energy costs boosted bus earnings. Revenue from the group's bus operations fell by 3.9% as growth from operations in Australia and China was offset by declines in Singapore and the UK. The temporary fare reduction, increase in transfer rebate and decline in bus ridership (-2.1%) led to a 7.3% decline in Singapore bus revenue. This was, however, offset by lower fuel prices which led to the surge in EBIT from S$3.1m in 2Q08 to S$10.7m.

Weak rail ridership seen in Jan-Jun. In 1H09, ComfortDelGro daily Singapore rail ridership rose 6.6% YoY to 0.36m, slower than 2008's growth of 15.4%. We are, however, upbeat that ridership figures could be stronger next year on the back of stronger economic and tourism growth. We expect NEL to see stronger ridership when RWS opens its doors in 1Q10.

Underperformed broader market despite healthy earnings. Since March, ComfortDelGro's stock price rose 22% vis-à-vis the STI's 76%. We believe the underperformance is unjustifiable given its stable earnings growth. An interim dividend of 2.63¢ was declared, representing a payout ratio of 50%. ComfortDelGro currently trades at 14.6x FY10 P/E multiple which is at the mid range of its 13-17x trading band. At our target price of S$1.78, ComfortDelGro will trade at an FY10 P/E multiple of 16.5x. We, however, prefer SMRT as it remains a key beneficiary to Singapore's land transport structural growth story.

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