comfortdelgro - tp upgrade
TRANSCRIPT
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Key company data: See page 2 for company data and detailed price/index chart.
ComfortDelGro Corp CMDG.SI CD SPTRANSPORT/LOGISTICS
EQUITY RESEARCH
Take advantage of temporary weakness
Reasonably priced with multiplepotential upside possibil ities
June 3, 2013
RatingRemains
Buy
arget price
Increased from 2.13SGD 2.19
Closing price
May 31, 2013SGD 1.90
Potential upside +15.3%
Action/Catalyst: TP raised to SGD2.19; looks reasonably priced
As we move into 2H13, it increasingly makes sense to start anchoringreturns based on 2014F earnings. As such, we raise our TP to SGD2.19,premised on our 2013/14F blended EPS of 12.9S$cent. We believe thestock is reasonably priced at the middle of its three-year trading range.
Catalyst: Upside from M&A and optionality on fare increase
There remains potential upside to our forecasts and valuations. Webelieve the group is still actively deploying its cash hoard into acquisitionswhich should be accretive to earnings and valuations. We estimate everySGD50mn worth of acquisitions will add ~2.4S$cent to our TP (+1%).
Separately, a fare increase could potentially add ~8S$cent to our TP(+4%) for every 1cent increase in fares. We do not profess to have anyinsight as to whether a fare increase will materialise, but choose to view itas an out-of-money option that comes free with the stock and which couldbe meaningful to earnings and valuations if it happens.
ValuationsIn the meantime, investors are paid to wait for the upside events tomaterialise as the stock offers a FY13/14F dividend yield of 3.5/3.7%. Thestock trades at 15.3/14.3x FY13/14F P/E (FY13/14F EPS of12.5/13.3S$cent, respectively) which is in the middle of its three-yeartrading range (11-17x).
Key risks include a loss of Australian bus contracts; higher-than-expectedlosses on DTL; regulatory changes; North-East Line breakdown; currency;higher oil price; higher staff cost.
31 Dec FY12 FY13F FY14F FY15F
Currency (SGD) Actual Old New Old New Old New
Revenue (mn) 3,545 3,689 3,785 3,872 4,059 4,211
Reported net profit (mn) 249 263 262 290 280 289
Normalised net profit (mn) 249 263 262 290 280 289
FD normalised EPS 11.84c 12.60c 12.46c 13.89c 13.31c 13.77c
FD norm. EPS growth (%) 5.1 5.7 5.2 10.2 6.8 3.5
FD normalised P/E (x) 16.1 N/A 15.3 N/A 14.3 N/A 13.8
EV/EBITDA (x) 5.4 N/A 5.3 N/A 4.7 N/A 4.4
Price/book (x) 2.0 N/A 1.9 N/A 1.8 N/A 1.7
Dividend yield (%) 3.4 N/A 3.5 N/A 3.7 N/A 4.0
ROE (%) 12.8 12.7 12.6 13.1 12.7 12.3
Net debt/equity (%) 0.4 0.4 3.2 net cash net cash net cash
Source: Company data, Nomura estimates
Anchor themes
Singapores long-term goal ofhaving at least 70% (fromcurrent 63%) of its population
relying on public transport by2020 means the two incumbentgovernment-linked operatorsstand to benefit from higherridership, particularly in the busand rail segments.
Nomura vs consensus
Our FY13F earnings are in linewith consensus estimates but2% above for FY14F earnings.
Research analysts
Singapore Transport/Logistics
Wen Jie Chan - NSL
[email protected]+65 6433 6965
See Appendix A-1 for analystcertification, importantdisclosures and the status ofnon-US analysts.
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Key data on ComfortDelGro CorpIncomestatement(SGDmn)Year-end 31 Dec FY11 FY12 FY13F FY14F FY15F
Revenue 3,411 3,545 3,785 4,059 4,211
Cost of goods sold -2,531 -2,643 -2,845 -3,057 -3,172
Gross profit 880 902 940 1,002 1,040
SG&A -481 -490 -510 -541 -561
Employee share expense
Operating profit 399 412 430 462 479
EBITDA 716 735 763 819 850
Depreciation -317 -323 -333 -358 -371
Amortisation 0 0 0
EBIT 399 412 430 462 479
Net interest expense -35 -31 -28 -33 -35
Associates & JCEs 5 4 4 4 5
Other income 10 12 8 8 8
Earnings before tax 379 396 413 441 457
Income tax -82 -86 -87 -93 -96
Net profit after tax 298 311 327 349 361
Minority interests -62 -62 -65 -69 -71
Other items 0 0
Preferred dividends 0 0 0
Normalised NPAT 236 249 262 280 289
Extraordinary items 0 0 0
Reported NPAT 236 249 262 280 289
Dividends -125 -135 -139 -147 -160
Transfer to reserves 110 114 123 133 130
Valuation and ratio analysis
Reported P/E (x) 16.9 16.1 15.3 14.3 13.8
Normalised P/E (x) 16.9 16.1 15.3 14.3 13.8
FD normalised P/E (x) 16.9 16.1 15.3 14.3 13.8
FD normalised P/E at price target (x) 19.4 18.5 17.6 16.5 15.9
Dividend yield (%) 3.1 3.4 3.5 3.7 4.0
Price/cashflow (x) 4.8 5.2 5.4 4.8 4.7
Price/book (x) 2.1 2.0 1.9 1.8 1.7
EV/EBITDA (x) 5.6 5.4 5.3 4.7 4.4
EV/EBIT (x) 10.0 9.6 9.3 8.3 7.7
Gross margin (%) 25.8 25.5 24.8 24.7 24.7EBITDA margin (%) 21.0 20.7 20.2 20.2 20.2
EBIT margin (%) 11.7 11.6 11.4 11.4 11.4
Net margin (%) 6.9 7.0 6.9 6.9 6.9
Effective tax rate (%) 21.5 21.6 21.0 21.0 21.0
Dividend payout (%) 53.3 54.0 53.0 52.6 55.2
Capex to sales (%) 14.8 13.9 12.2 10.5 10.4
Capex to depreciation (x) 1.6 1.5 1.4 1.2 1.2
ROE (%) 12.8 12.8 12.6 12.7 12.3
ROA (pretax %) 10.3 10.2 10.1 10.3 10.5
Growth (%)
Revenue 6.4 3.9 6.8 7.2 3.7
EBITDA 5.4 2.7 3.8 7.3 3.7
EBIT 2.8 3.3 4.3 7.4 3.6
Normalised EPS 2.9 5.1 5.2 6.8 3.5
Normalised FDEPS 2.9 5.1 5.2 6.8 3.5
Per share
Reported EPS (SGD) 11.27c 11.84c 12.46c 13.31c 13.77c
Norm EPS (SGD) 11.27c 11.84c 12.46c 13.31c 13.77c
Fully diluted norm EPS (SGD) 11.27c 11.84c 12.46c 13.31c 13.77c
Book value per share (SGD) 0.90 0.96 1.02 1.08 1.15
DPS (SGD) 0.06 0.06 0.07 0.07 0.08
Source: Company data, Nomura estimates
Relative perfo rmance chart (one year)
Source: ThomsonReuters, Nomura research
(%) 1M 3M 12M
Absolute (SGD) -4.0 -0.8 29.6
Absolute (USD) -6.3 -2.9 31.7
Relative to index -1.6 -2.0 12.1
Market cap (USDmn) 3,152.4
Estimated free float (%) 87.8
52-week range (SGD) 2.21/1.44
3-mth avg daily turnover(USDmn)
13.77
Major shareholders (%)
Singapore LabourFoundation
12.2
Source: Thomson Reuters, Nomura research
Notes
FY14F to benefit from DTL
commencement
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Cashflow(SGDmn)Year-end 31 Dec FY11 FY12 FY13F FY14F FY15F
EBITDA 716 735 763 819 850
Change in working capital 137 3 -20 18 11
Other operating cashflow -31 25 -1 -1 -4
Cashflow from operations 822 763 742 836 857
Capital expenditure -503 -492 -463 -426 -440
Free cashflow 318 272 279 410 417
Reduction in investments -79 21 0 0 0
Net acquisitions -69
Reduction in other LT assets 81 -27 -4 -4 -5
Addition in other LT liabilities 67 4 9 10 10
Adjustments -96 -94 -114 -79 -79
Cashflow after investing acts 291 177 102 336 343
Cash dividends -115 -130 -132 -140 -152
Equity issue 0 0 0 0 0
Debt issue -120 87 84 44 -65
Convertible debt issue 0 0 0 0 0
Others -46 -16 -28 -33 -35
Cashflow from financial acts -281 -59 -76 -129 -251
Net cashflow 10 118 25 207 92
Beginning cash 567 577 695 720 927
Ending cash 577 695 720 927 1,019
Ending net debt 55 9 68 -96 -252
Source: Company data, Nomura estimates
Balancesheet(SGDmn)As at 31 Dec FY11 FY12 FY13F FY14F FY15F
Cash & equivalents 577 695 720 927 1,019
Marketable securities 18 0 0 0 0
Accounts receivable 133 129 150 161 167
Inventories 57 58 62 67 70
Other current assets 196 213 264 280 289
Total current assets 979 1,094 1,197 1,435 1,545
LT investments 86 83 83 83 83
Fixed assets 3,011 3,100 3,339 3,407 3,476
Goodwill 146 176 176 176 176
Other intangible assets 0 0 0 0 0
Other LT assets 367 393 397 402 406
Total assets 4,589 4,846 5,191 5,503 5,685
Short-term debt 198 96 114 222 129Accounts payable 601 607 662 710 737
Other current liabilities 203 214 216 218 219
Total current liabilities 1,002 917 992 1,150 1,086
Long-term debt 434 608 674 609 637
Convertible debt 0 0 0 0 0
Other LT liabilities 680 684 693 703 713
Total liabilities 2,115 2,209 2,359 2,462 2,435
Minority interest 582 629 693 763 834
Preferred stock 0 0 0 0
Common stock 569 585 585 585 585
Retained earnings 1,323 1,423 1,553 1,693 1,831
Proposed dividends 0 0 0
Other equity and reserves 0 0 0
Total shareholders' equity 1,892 2,008 2,138 2,278 2,416
Total equity & liabilities 4,589 4,846 5,191 5,503 5,685
Liquidity (x)
Current ratio 0.98 1.19 1.21 1.25 1.42
Interest cover 11.3 13.1 15.1 14.1 13.9
Leverage
Net debt/EBITDA (x) 0.08 0.01 0.09 net cash net cash
Net debt/equity (%) 2.9 0.4 3.2 net cash net cash
Act ivi ty (d ays)
Days receivable 12.7 13.5 13.4 14.0 14.2
Days inventory 8.3 7.9 7.7 7.7 7.9
Days payable 82.6 83.7 81.4 81.9 83.3
Cash cycle -61.6 -62.2 -60.3 -60.2 -61.2
Source: Company data, Nomura estimates
Notes
Strong FCF generation across
forecast period
Notes
Low gearing going into net cash
position
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ValuationsOverall, we believe valuations appear reasonable at current levels, especially if we
assess them based on 2014F earnings. There remains certain potential upside
possibilities from current levels, in our opinion, namely accretive acquisitions and
potential fare increases. In the meantime, investors are paid a FY13F dividend yield of
3.5% while waiting for the upside events to materialise, which gives them a return and
help reduce the downside risk. As such, we think the risk/reward at this level is
reasonably attractive.
Looking ahead into FY14F
In our opinion, 2014 will be a year of significant development for the group, relative to
2013. The new Downtown Line will have already commenced and should be contributing
meaningfully. Recent acquisitions whose cumulative deal sizes are close to an all-time
high are also likely to start contributing on a full-year basis. Further, as we move into
2H13F, it increasingly makes sense for investors to start anchoring returns based on
FY14F earnings. As such, we raise our TP to S$2.19, premised on blended FY13/14F
EPS of 12.9$cent.
We cross-check our SOTP valuations against other valuation methods and generally
found support for our TP.
The stock currently trades at FY13/14F P/E of 15.3/14.3x FY13/14F P/B of 1.9/1.8x,
which is at the mid-end of its recent trading band (three-year range: 11-17x). It offers a
FY13/14F dividend yield of 3.5/3.7%.
Fig. 1: SOTP
Source: Nomura estimates
SOTP FY13 E P/E Valuation Basis
Taxi - SG 88.4 19 1,701 Premium for being mkt leader
Bus + Rail + ad + rental - SG (ex DTL) 24.6 17 419 SMRT valuations
DTL 472 DCF
Bus + Taxi - UK 28.7 11 315 UK peers valuations
Bus + Taxi - Australia 25.1 12 301 Cabcharge valuations
Bus + Taxi - China + Vietnam 16.7 12 201 Cabcharge valuations
Inspection/testing 21.1 16 338 Vicom valuations
Driving school 8.7 16 139 Vicom valuations
Automotive & Car Rental 52.1 10 521 Stable underlying business
Equity stake in Cabcharge 59 9.6% stake in CAB AU @ market price
Total (S$'mn) 262.0 17.0 4,466
Shares('000) 2,102,000
TP 2.12
SOTP FY14 E P/E Valuation Basis
Taxi - SG 92.3 19 1,778 Premium for being mkt leader
Bus + Rail + ad + rental - SG (ex DTL) 28.7 17 488 SMRT valuations
DTL 487 DCF
Bus + Taxi - UK 34.9 11 384 UK peers valuations
Bus + Taxi - Australia 24.0 12 288 Cabcharge valuations
Bus + Taxi - China + Vietnam 17.8 12 214 Cabcharge valuations
Inspection/testing 22.7 16 364 Vicom valuationsDriving school 8.9 16 142 Vicom valuations
Automotive & Car Rental 54.2 10 542 Stable underlying business
Equity stake in Cabcharge 59 9.6% stake in CAB AU @ market price
Total (S$'mn) 279.7 17.0 4,745
Shares('000) 2,102,000
TP 2.26
Blended TP 2.19
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Fig. 2: Valuation range
Source: Nomura research
Fig. 3: 12-month forward P/E band
Mid range of trading range
Source: Bloomberg, Nomura research
Fig. 4: 12-month fo rward P/B band
Mid range of trading range
Source: Bloomberg, Nomura research
Fig. 5: Peer comps
Source: Bloomberg consensus for Not Rate (NR) stocks, Nomura estimates; Prices as at 31 May 2013
2.00
1.80
2.19
2.38
1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60
Historical valuations - P/B
Historical valuations - P/E
SOTP
DCF
0.5
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Price (S$)
20X
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0.50
0.70
0.90
1.10
1.30
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Price (S$)PBV (x)
PBV (RHS) Average SD- SD+ Price (LHS)
Ticker Rating
Mkt Cap
(US$ mn)
Price
(LC)
P/E (x)
2013E
P/E (x)
2014E
P/B (x)
2013E
P/B (x)
2014E
EV/EBITDA
(x)
2013E
EV/EBITDA
(x)
2014E
ROE
(%)
2013E
ROE
(%)
2014E
Div yield
(%)
2013E
Div yield
(%)
2014E
Debt/
Asset
(%)
Singapore
Comfort Delgro CD SP BUY 3,193 1.905 15.2 14.3 1.9 1.8 6.1 5.7 12.6 12.7 3.5 3.7 15.2SMRT MRT SP REDUCE 1,721 1.43 22.3 20.5 2.6 2.5 7.5 6.9 12.1 12.5 2.8 3.0 30.2SG Average 18.8 17.4 2.3 2.1 6.8 6.3 12.4 12.6 3.1 3.3 22.7
HK
MTR Corp 66 HK BUY 22,922 30.7 22.1 17.6 1.2 1.2 14.4 12.3 5.6 7.0 2.6 2.6 16.6
HK Average 22.1 17.6 1.2 1.2 14.4 12.3 5.6 7.0 2.6 2.6 16.6
Asia Average 19.9 17.5 1.9 1.8 9.3 8.3 10.1 10.7 3.0 3.1 20.7
Japan
East Japan Railway 9020 JP BUY 29,855 7580 14.9 16.4 1.4 1.3 7.9 7.6 9.6 9.6 1.7 1.8 44.2
West Japan Railway 9021 JP BUY 8,331 4225 13.1 13.7 1.0 1.0 6.4 6.2 7.7 8.2 2.6 2.8 69.3
Central Japan Rai lway 9022 JP BUY 22,947 11200 10.0 12.9 1.3 1.2 6.3 6.1 12.2 10.9 1.0 1.0 44.6
Kintetsu Corp 9041 JP Not Rated 7,148 420 31.6 32.8 3.3 3.1 18.5 17.8 11.4 11.9 1.2 1.0 67.4
Odakyu Elec Rai lway 9007 JP Neutral 7,257 990 37.1 44.0 3.1 2.9 16.2 15.9 14.1 77.9 0.8 0.8 60.3Japan Average 21.3 24.0 2.0 1.9 11.1 10.7 11.0 23.7 1.4 1.5 57.1Asia-pac Average 19.6 21.4 1.8 1.7 10.5 10.1 10.5 15.8 2.4 2.1 43.7
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Where is the upside?
Further potential upside to our numbers from accretiveacquisitions
ComfortDelgro has been successful in growing its business with incremental bolt-on
acquisitions. Return on investments in Australia has been at a respectable ROI (pre-tax)
of 8.5%, higher than its mid single digit ROA (5+%).
We expect the group to continue making accretive acquisitions overseas, subject to
available targets at the right price. We have not factored these acquisitions into our
numbers and, as such, represent potential upside to our forecast. In an effort to quantify
the impact, we estimate that the incremental impact of acquisitions on earnings could go
up to 5% in the immediate period, subject to the acquisition size. We estimate that every
S$50mn worth of acquisition will add ~2.4S$cent to our TP (+1%).
Free opt ion on fare increase
We do not profess to have any insight as to whether a fare increase will materialise, but
choose to view it as an out-of-money option that comes free with the stock and which
could meaningfully contribute to earnings and valuations if it happens.
Every 1 S$cent increase in fares could add up to S$9.4mn to FY14 earnings and up to
~8S$cent to our TP (+4%). This is assuming that a similar fare increase quantum is
given for both rail and bus fares. We note that it is possible for the fare increase to be
different across bus and rail, which was the case back in 2007.
Fig. 6: Scenario analys is: Fare increase
Source: Nomura estimates
Bus Fare increase 1 S$cent 2 S$cent 3 S$centBus ridership in FY14F ('mn) 999 999 999Revenue increase (S$'mn) 10.0 20.0 30.0100% passthrough to earnings (S$'mn) 10.0 20.0 30.0Earnings accretion, adjust for MI of 25% (S$'mn) 7.5 15.0 22.5
% impact on FY14F earnings 2.7% 5.4% 8.0%P/E Multiple (x) for SBST 17 17 17
Accretion to valuation (S$'mn) 127.4 254.7 382.1Accretion to TP (S$cent) 0.06 0.12 0.18
% impact on valuation 2.8% 5.5% 8.3%
Rail Fare increase 1 S$cent 2 S$cent 3 S$centRail Ridership in FY14F ('mn) 249 249 249Revenue increase (S$'mn) 2.5 5.0 7.5100% passthrough to earnings (S$'mn) 2.5 5.0 7.5Earnings accretion, adjust for MI of 25% (S$'mn) 1.9 3.7 5.6% impact on FY14F earnings 0.7% 1.3% 2.0%P/E Multiple (x) for SBST 17 17 17Accretion to valuation (S$'mn) 31.7 63.4 95.1Accretion to TP (S$cent) 0.02 0.03 0.05% impact on valuation 0.7% 1.4% 2.1%
Overall 1 S$cent 2 S$cent 3 S$centAccretion to earnings (S$'mn) 9.4 18.7 28.1% impact on FY14F earnings 3.3% 6.7% 10.0%Accretion to valuation (S$'mn) 159.1 318.1 477.2Accretion to TP (S$) 0.08 0.15 0.23% impact on valuation 3.5% 6.9% 10.4%
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Downtown Line (DTL): Still a positiveWe revise our assumptions to assume a faster ramp-up in hiring prior to the opening of
the various phases of the Downtown Line, as the group hires ahead of requirements. We
note that the rate of hiring is a moving target as the group is similarly figuring out the
right pace and quantity of manpower needed for the operations. We also tweak our
average fare assumption downwards to be conservative on how much is achievable for
the distance travelled on the DTL.
Still a positive for earnings growth
Despite these adjustments, our revised numbers still show that the entire DTL will be
profitable by FY16F, which is in line with our original expectations albeit at a lower profit
level. Further, we note that even though the Downtown Line is likely to still be loss-
making up until FY16F, what matters is that the losses are reduced across time as the
lines begin to contribute. Consequently, this is a positive delta which is a positive for
earnings growth.
Fig. 7: Downtown Line projected profitability
Still breaking even by FY16F
Source: Nomura estimates
Downtown Line Factors taken into considerat ion FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F
Avg da ily ridersh ip in yr 37,50 0 82,50 0 132,500 265,000 370,000 642,5 00 707,5 00 742,8 75
Phase 1 - @end of period Assuming quick ramp-up in 1st 3yrs 75,0 00 9 0,0 00 100 ,00 0 105 ,000 1 10 ,000 1 15 ,0 00 1 20 ,0 00 1 26 ,0 00
Phase 2 - @end of period Growth tapers off and stabilise at 5% p.a. 150,000 175,000 200,000 210,000 220,000 231,000
Phase 3 - @end of period Growth rate slows further in later years 300,000 350,000 400,000 420,000
Avg da ily ridersh ip at end of yr 75,000 90,00 0 250,000 280,000 610,000 675,0 00 740,0 00 777,0 00
Ave Fare ($) Shorter route distance vs NEL 0.6 0.6 0.68 0.75 0.81 0.87 0.87 0.87
0 0 0 0 0 0 0 0
Rental space 25,834 25,834 35,521 35,521 150,696 150,696 150,696 150,696
rent $psf/mth In line with NEL's retail space 24 24 22 22 20 20 20 20
Rental income 0.4 6 7 8 11 25 36 36
Occupancy Assuming a ramp-up in leasing 20% 80% 75% 80% 31% 69% 100% 100%
Revenue - train 0.3 18.1 32.6 72.5 109.4 204.0 224.7 235.9
Revenue - rental & ad 0.4 6.0 7.1 7.5 11.3 25.1 36.2 36.2
Revenue (DTL) 0.7 24.0 39.7 80.0 120.7 229.1 260.8 272.1
License fees 0.0 0.0 0 0.0 0 40.0 50.0 60.0
License fees (annualised) 0.0 0.0 0 0.0 20.0 45.0 55.0 65.0
Op stats Phase 1 Phase 2 Phase 3
Fleet (3-cars) 8.0 24 41.0
Cumulat ive 8.0 8.0 32.0 32.0 73.0 73.0 73.0 73.0
Stations 6.0 12 16.0
Cumulat ive 6.0 6.0 18.0 18.0 34.0 34.0 34.0 34.0
Route Km 4.3 16.6 21.1
Cumulat ive 4.3 4.3 20.9 20.9 42.0 42.0 42.0 42.0
Timing gap/trip (min) Assuming frequency increases w time 5.0 4.8 4.6 4.2 4.0 3.6 3.5 3.4
# of trips/day (implied) 216.0 225.0 234.8 257.1 270.0 300.0 308.6 317.6
# of km travelled/day 929 968 4,907 5,374 11,340 12,600 12,960 13,341
Cost Phase 1 Phase 2 Phase 3
Staff # of stations & trains vs NEL 300 300 400
Cumulative # of staff Mgt guidance for Phase 1 400 600 700 1,000 1,000 1,030 1,061 1,082
Cost/employee (p.a.) Adjusting for economies of scale 0.048 0.049 0.050 0.051 0.052 0.053 0.054 0.055
Staff cost 14.400 14.982 20.783Staff cost - cumulative 15.6 24.5 35.0 43.3 52.0 54.6 57.3 59.7
Repair # of trains vs NEL Phase 1 Phase 2 Phase 3
Repair cost - (annualised) Adjusting for younger fleet 4.0 4.4 6.9 9.9 15.8 22.8 23.2 23.7
Electricity # of trips & # of stations vs NEL Phase 1 Phase 2 Phase 3
Electricity - (annualised) Adjusting for rolling stk efficiency 5.3 5.6 14.5 23.5 31.1 41.0 43.1 45.2
& NEL's economies of scale
Total cost (annualised) 24.9 34.4 56.3 76.7 98.8 118.4 123.6 128.6
Total cost (adjusted for startup t iming) 16.4 34.4 45.4 76.7 87.7 118.4 123.6 128.6
EBIT -15.7 -10.4 -5.7 3.4 12.9 65.7 82.2 78.5
EBIT (less rental) -16.0 -16.4 -12.7 -4.1 1.7 40.6 46.0 42.3
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Earnings overview
Slight tweaks to our FY13F and FY14F earnings
We adjust our FY13F and FY14F earnings downwards by 1% and 3%, respectively. Key
changes involve a lower profit contribution for the DTL due to higher cost assumptions
and higher losses from the Singapore bus business due to ineffectiveness of bus
subsidies. We also pre-emptively pencil-in potentially lower Australian bus margins due
to re-tendering of routes.
Group continues to deliver decent growth
Despite these changes, the group continues to grow earnings at a decent clip of 6% (y-y)
in FY14F. This is in part because management has pre-emptively grown and replenished
lost earnings through acquisitions such as the acquisition of selected Firstgroup bus
assets in London. It is also partly because the DTL will commence and bring in revenues
to offset the start-up costs currently depressing rail profits.
We expect potential upside to our forecasts from more accretive acquisitions. We view a
fare increase, if any, as an out-of-the-money option which will give a kicker if it
materialises.
Segment out look
Overall, we expect earnings growth across the forecast period to remain in line with
historical growth rates (10-year CAGR of 6.6%). FY14F will be driven by full-year
earnings contribution from recent acquisitions and from the DTL as it commences
operations, and brings in revenues to offset the start-up costs currently depressing rail
profits. FY15F earnings will continue to be significantly driven by the rail segment.
The more immediate FY13F net profit should see earnings driven by continued growth in
the taxi operations, better performance in the rail segment and also the car rental and
driving business, offset by a continued drag from the Singapore bus business.
Contributions from recent acquisitions will also be reflected in 2HFY13F.
We expect the bus and taxi segment to remain key earnings contributors, with
automotive and vehicle inspection/testing next up in line and rail earnings increasing in
importance.
We believe acquisitions will be the key driver of the bus divisions earnings and to offset
a loss of bus routes in Australia, currency headwinds that both the UK and Australian
businesses face and continued losses in the Singapore bus segment.
On the taxi front, we expect Singapore and China to maintain its growth profile and offset
a contracting UK business suffering from the economic malaise. We anticipate growth
from Australia to be low due to economic headwinds in Australia.
We expect rail segment profits to contract further in FY13F due to start-up costs but to
pick up quite sharply in FY14F as the DTL ramps up and start contributing revenues to
offset the start-up costs. We expect the DTL to turn profitable by FY16F as the rate ofincrease in revenues outpaces the rate of growth in costs.
Growth in earnings for the vehicle inspection/testing business remains one of the
outperformers in the group. However, we expect the long-term growth profile to be lower
than historical experience (8% v >10% previously) due to slower vehicular growth in
Singapore and a maturing growth profile for the testing business, after growing from a
small base.
Automotive segment earnings have historically been quite volatile due to the inclusion of
diesel sales within the segment. The historical variance in EBIT growth rate has been
20+% in either direction and has largely been driven by movement in oil prices and
diesel sales margins. The underlying engineering and repair business is generally stable
and exhibit a low single digit growth rate. We have assumed a normalised growth rate in
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our forecasts, though the volatile nature of automotive earnings may cause surprises on
the upside/downside. EBIT margins in FY13F will improve as they close down their car
distribution business in China, which is mildly unprofitable and a low margin business to
begin with.
We expect growth for its bus station in China to continue growing at a modest pace,
while growth for the driving centre business in FY13F should be good due to strong cost
control and steady growth in enrolment. Separately, we think the car rental business will
continue to see modest growth across the forecast period. Contributions from these
three segments combined is
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Fig. 8: Segment breakdown
Source: Company data, Nomura estimates
FY07A FY08A FY09A FY10A FY11A FY12F FY13F FY14F FY15F
Bus
Revenues 1537.0 1532.8 1530.9 1612.2 1684.1 1719.7 1864.0 2013.3 2051.2
% growth 11.9% -0.3% -0.1% 5.3% 4.5% 2.1% 8.4% 8.0% 1.9%
EBIT 132.7 96.3 123.9 149.2 145.0 145.6 153.8 162.1 155.9
% growth 4% -27% 29% 20% -3% 0% 6% 5% -4%
EBIT mrgns 8.6% 6.3% 8.1% 9.3% 8.6% 8.5% 8.3% 8.1% 7.6%
Bus Station
Revenues 17.9 19.4 21.4 22.7 23.9 25.7 27.5 29.1 30.6
% growth 14.0% 8.4% 10.3% 6.1% 5.3% 7.5% 7.0% 6.0% 5.0%
EBIT 7.9 10.1 10.3 10.6 10.8 11.4 12.4 13.1 13.8
% growth 10% 28% 2% 3% 2% 6% 9% 6% 5%
EBIT mrgns 44.1% 52.1% 48.1% 46.7% 45.2% 44.4% 45.0% 45.0% 45.0%
Rail
Revenues 90.5 110.5 119.7 134.4 147.0 153.2 163.9 197.7 224.5
% growth 18.1% 22.1% 8.3% 12.3% 9.4% 4.2% 7.0% 20.6% 13.6%
EBIT 9.2 16.7 20.5 25.6 27.7 14.3 10.3 19.1 25.3
% growth 1433% 82% 23% 25% 8% -48% -28% 85% 32%
EBIT mrgns 10.2% 15.1% 17.1% 19.0% 18.8% 9.3% 6.3% 9.7% 11.3%
EBIT (excl DTL) 27.7 24.3 26.0 29.5 31.0
% growth 8% 7% 5% 5%
TaxiRevenues 917.3 945.3 927.6 981.9 1039.2 1120.5 1183.9 1245.0 1301.2
% growth 5.9% 3.1% -1.9% 5.9% 5.8% 7.8% 5.0% 5.0% 5.0%
EBIT 121.2 102.1 105.2 119.3 129.6 140.1 149.7 157.8 166.3
% growth 12% -16% 3% 13% 9% 8% 7% 5% 5%
EBIT mrgns 13.2% 10.8% 11.3% 12.1% 12.5% 12.5% 12.6% 12.7% 13.0%
Diesel sales
Revenues 192.2 253.5
% growth -8.4% 31.9%
EBIT 8.1 0.0
% growth -38% -100%
EBIT mrgns 4.2% 0.0%
Auto motive Eng ineering
Revenues 97.8 92.6 307.4 300.1 351.6 354.9 365.5 383.8 403.0
% growth -5.6% -5.3% 232.0% -2.4% 17.2% 0.9% 3.0% 5.0% 5.0%
EBIT 22.2 16.9 51.2 39.1 37.5 51.2 49.3 51.8 52.4
% growth -3% -24% 203% -24% -4% 37% -4% 5% 1%
EBIT mrgns 22.7% 18.3% 16.7% 13.0% 10.7% 14.4% 13.5% 13.5% 13.0%
Vehicle inspection/testing
Revenues 62.4 72.7 77.3 83.7 90.9 97.8 105.1 113.0 121.5
% growth 14.1% 16.5% 6.3% 8.3% 8.6% 7.6% 7.5% 7.5% 7.5%
EBIT 15.4 19.8 24.7 27.3 30.7 32.6 35.3 38.1 41.2
% growth 22% 29% 25% 11% 12% 6% 8% 8% 8%
EBIT mrgns 24.7% 27.2% 32.0% 32.6% 33.8% 33.3% 33.5% 33.7% 33.9%
Car rental & leasing
Revenues 36.1 37.0 33.3 33.6 35.4 35.5 36.2 36.9 37.7
% growth -1.4% 2.5% -10.0% 0.9% 5.4% 0.3% 2.0% 2.0% 2.0%
EBIT 6.7 6.9 4.4 5.9 7.3 8.9 9.4 9.6 9.8% growth -8% 3% -36% 34% 24% 22% 6% 2% 2%
EBIT mrgns 18.6% 18.6% 13.2% 17.6% 20.6% 25.1% 26.0% 26.0% 26.0%
Driving centre
Revenues 29.6 33.5 34.2 38.3 39.0 38.0 39.2 40.4 41.6
% growth 21.3% 13.2% 2.1% 12.0% 1.8% -2.6% 3.0% 3.0% 3.0%
EBIT 7.2 9.2 9.7 11.4 10.6 8.2 9.8 10.1 10.4
% growth 22% 28% 5% 18% -7% -23% 19% 3% 3%
EBIT mrgns 24.3% 27.5% 28.4% 29.8% 27.2% 21.6% 25.0% 25.0% 25.0%
Others 4.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total EBIT 334.8 278.0 349.9 388.4 399.2 412.3 430.0 461.7 475.1
EBIT growth % 10% -17% 26% 11% 3% 3% 4% 7% 3%
EBIT mrgns % 11.1% 8.9% 11.5% 12.1% 11.7% 11.6% 11.4% 11.4% 11.3%
Have since been subsumed into the
automotive engineering segment
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Fig. 9: FY13F EBIT contribu tion by segment
Source: Company data, Nomura estimates
Fig. 10: FY15F EBIT cont ribu tion by segment
Source: Company data, Nomura estimates
35.8%
2.9%2.4%
34.8%
11.5%
8.2%2.2% 2.3%
Bus Bus station Rail Taxi
Automotive Engineering Vehicle inspection/testing Car rental & leasing Driving Centre
32.8%
2.9%
5.3%35.0%
11.0%
8.7%2.1% 2.2%
Bus Bus station Rail Taxi
Automotive Engineering Vehicle inspection/testing Car rental & leasing Driving Centre
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Key Risks
Loss of Australian bus contracts
There is a risk that the group may lose the re-tender for a major bus route in New South
Wales (NSW), Australia. This is on the back of a recent loss of two existing bus routes in
NSW in a re-tendering exercise. We estimate that the loss of the major bus route could
impact FY14F/15F earnings by close to 3% (after adjusting for its 51% stake in the
Australian bus operations), depending on the handover timing of the bus routes in theevent of a loss. We have currently assumed that they would win the re-tender but at a
lower EBIT margin of 8% (current EBIT margin: 18 19%).
Higher-than-expected losses on DTL
The DTL could see losses run deeper and longer if ridership numbers and average fares
are below expectations. A slower leasing rate or lower rental rates for its retail space,
together with higher cost pressures, could also cause the DTL to be less profitable than
our expectations.
Regulatory changes
In 2013, the Singapore government will release its new Land Transport Masterplan
which will outline the governments key strategic thrusts for the sector over the next five
years. We could see further tightening of the regulatory environment, which might
depress the profitability of public transport operators, including ComfortDelgro, which
generates ~50% of its earnings from Singapore.
NEL breakdown
The NEL is entering into its 10th year of operations and has seen a greater frequency of
breakdowns that have been put under the public spotlight. We are already seeing the
group spending more on repair and maintenance to raise service reliability. The concern
is that further breakdowns could lead to an upgrading plan that could require significant
capex outlay which would depress profitability and cashflows.
Currency headwinds
Though operational performance of overseas operations has been commendable, their
contribution to the groups growth have been weakened by a stronger SGD. We estimate
that a stronger SGD, based on Nomuras forex forecasts, can potentially shave 1-3% off
earnings growth on the EBIT level.
Higher oil prices
Even though fuel and electricity costs make up only ~10% of the groups cost base, it
has been a significant drag on earnings in the recent years due to high oil prices. If oilprices go up higher, we could see a reduction in our growth estimates. We estimate that
a 1% change in oil prices has a 90% pass-through effect to the bottom line.
Higher staff cost
Given the tight labour market in Singapore, the group may have difficulty fulfilling their
manpower needs at a reasonable cost, especially since they are expanding their bus and
rail operations in Singapore. Furthermore, there has been an increased focus on raising
the wages of lower income employees in Singapore, which may affect the group. Staff
cost currently make up close to 40% of the groups cost base.
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Key Catalysts
Higher d ividends
Viewed as a defensive yield stock, a higher dividend payment could cause the stock to
re-rate. With its payout ratio at only 50%, the group can pay out more of its growing
profits. A robust balance sheet with near-zero gearing also provide room for higher
dividend through capital management.
Higher average fares; longer average travelling distance
The fare formula review and the subsequent fare review in 2Q/3QFY13 could see higher
fare levels. Average fares could also increase on the back of longer average travelling
distance by commuters. Such increases will be positive for the bottom line as it will be
amplified by the high operating leverage effect.
Better-than-expected performance of Downtown Line
Lower-than-expected losses on the DTL, when it commences operations in 4QFY13, will
alleviate fears of it being a drag on earnings for multiple years. With the overhang of fear
removed, we could see the stock re-rate.
Subsidies & grants
Better-than-expected subsidies for the bus segment would be a key contributor to better
earnings and cashflows.
Change in Singapore bus framework
A game changer could come if the government, through its review of the Land Transport
Masterplan, decides that a cost-plus model will be more suited for managing bus
operations in Singapore. A cost-plus model will potentially be more rewarding for
operators as they are rewarded based on what they can control costs and as such,
the bus segment could see a reversal of its losses.
Better cost contro l
With electricity/diesel cost being one of the main drag on earnings, lower oil prices would
be beneficial. Similar benefits could be achieved with well placed fuel/electricity hedges.
Higher productivity and a slower expansion in headcount could see cost increase being
slower than expected, which would be a positive for earnings.
M&A
New accretive acquisitions would be viewed favourably and could cause the stock to
rerate, depending on the deal size and impact on the bottom line.
Shift to new rail financing framework
ComfortDelgro could potentially shift its existing rail operating license to the new regime
which is currently applied to the new Downtown Line. Under the new Downtown Line
regime, the operator will not be required to fund replacement assets. The quid pro quo
will be a shorter license period and possibly, a higher annual license fee. The new
regime will eliminate cashflow uncertainty revolving around capex and potentially lead to
higher valuations. However, a shorter operating license period and a possibly higher
annual license fee may be taken negatively, and the outcome is therefore mixed and
likely to be dependent on the specific details of the arrangement.
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Appendix A-1
Analyst Cert ificat ion
I, Wen Jie Chan, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures
The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers
Issuer Ticker Price Price date Stock rating Sector rating Disclosures
ComfortDelGro Corp CD SP SGD 1.90 31-May-2013 Buy Not rated
ComfortDelGro Corp (CD SP) SGD 1.90 (31-May-2013)
Rating and target price chart (three year history)
Buy (Sector rating: Not rated)
Date Rating Target price Closing price
23-Jan-13 2.13 1.87
23-Nov-12 1.86 1.66
07-Sep-11 1.72 1.35
21-Jan-11 Buy 1.62
21-Jan-11 1.98 1.62
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of SGD2.19 is based on our SOTP valuations of the different segments within thegroup, using blended FY13/14F EPS.
Risks that may impede the achievement of the target priceKey risks: loss of Australian bus contracts; slower-than-expectedramp-up of DTL; NEL breakdown; regulatory changes; currency headwinds; higher oil price; higher staff cost
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Important DisclosuresOnline availability of research and conflict-of-interest disclosuresNomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne.Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxor requestedfrom Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, pleaseemail [email protected] help.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report arenot registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject toFINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities heldby a research analyst account.Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDPI) and Nomura International plc. (NIplc) areregistered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, andNIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.Any authors named in this report are research analysts unless otherwise indicated. Industry Specialistsidentified in some Nomura Internationalplc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they havecoverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing
Analystsidentified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsiblefor marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute toresearch reports in which their names appear and publish research on their sector.Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows:
43% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with thisrating are investment banking clients of the Nomura Group*.46% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 48% of companies withthis rating are investment banking clients of the Nomura Group*.11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 23% of companies withthis rating are investment banking clients of the Nomura Group*.As at 31 March 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report.Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.STOCKSA rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, targetprice and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.Benchmarks are as follows: United States/Europe: please see valuation methodologies for explanations of relevant benchmarks for stocks,which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global EmergingMarkets (ex-Asia):MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.SECTORSA 'Bullish'stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral'stance,indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates thatthe analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500;Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy'recommendation indicates thatpotential upside is 15% or more. A 'Neutral'recommendation indicates that potential upside is less than 15% or downside is less than 5%. A'Reduce'recommendation indicates that potential downside is 5% or more. A rating of 'Suspended'indicates that the rating and target pricehave been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura isacting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelledas 'Not rated'or shown as 'No rating'are not in regular research coverage of the Nomura entity identified in the top banner. Investors shouldnot expect continuing or additional information from Nomura relating to such securities and/or companies.SECTORSA 'Bullish'rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation. A 'Neutral'rating means most stocks in the sector have (or the weighted average recommendation of the stocksunder coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.
http://www.nomuranow.com/researchhttp://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxmailto:[email protected]://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxhttp://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxmailto:[email protected]://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxhttp://www.nomuranow.com/research -
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Target PriceA Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may beimpeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.
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