ComfortDelgro (KimEng)

Event

ComfortDelgro’s 2Q11 results are within expectations, reflecting a resilient performance (2Q profit +3%, 1H -2%) despite the many challenges, which included an unhedged fuel position and weaker currencies that affected 26% of group revenue. Profit growth was across all segments except Singapore bus and China driving center. With 40% of diesel requirements in Singapore and the UK now hedged till December, we expect the next two quarters to stay similarly resilient. Comfort still faces many challenges, especially on the domestic front, but with valuations almost down to 2008 crisis lows, we upgrade the stock to BUY with a target price of $1.58 pegged to long-term PER mean of 15x.

Our View Overseas transport businesses did better than local businesses as Australia benefited from the acquisition of Swan Taxi last year, organic expansion of bus routes in New South Wales and Victoria, and the strong A$ that mitigated the impact of the weak pound and renminbi. Collectively, the UK and China businesses accounted for 26% of group revenue.

However, Singapore bus was hard hit by a sharp jump in diesel and electricity costs (+18.5% YoY), and suffered an operating loss if advertising revenue was excluded. Also, the average fares for both bus and train fell 3-4% YoY following the onset of distance fares. Only the taxi business fared relatively better due to fleet additions and higher cashless transactions.

Moving forward, we expect the next two quarters to stay resilient, as Comfort has increased its diesel hedge in Singapore and the UK to 40% of bus operating requirements, with a view to increasing further to over 50% if possible. Also, the recent approved 1% fare increase should alleviate the cost pressure somewhat, if incompletely.

Action & Recommendation

While growth challenges remain, earnings should stay resilient with diesel concerns alleviated for now. Valuations are back to crisis lows. We upgrade our rating to BUY.