What is the news?

Driven by a 3.9% growth in revenue, ComfortDelGro reported a 5.6% improvement in net profit. Overseas entities contributed to 46% of the group’s operating profit, with Australia accounting for 50% of them. CDG continues to search for suitable acquisitions, but would remain prudent so as not to overpay for them. Management continues to guide for cost pressures in its outlook statement. An increased final DPS of 3.5cents was proposed, taking full year payout to 6.4cents for FY2012.

How do we view this?

We believe that CDG’s strong cash balance of S$695mn and low net gearing of 0.3% allows them to continue their M&A spree. CDG retained close to half of its net profits to fund its acquisitions drive for global diversification. We opine that uncertainties over the operating landscape for the local land transport operators could limit upside in the stock. Furthermore, start up losses for the downtown line could intensify in the months ahead as DTL ramps up its headcount to 400 at the end of 2013 (current: c.210).

Investment Actions?

From the recent low of S$1.26 in mid 2011, the stock of ComfortDelGro had rallied by more than 50% to the current price of S$1.91. Valuations are no longer attractive at 15.6X FY13E and see limited upside from here on. Downgrade to Neutral (Target Price: $1.83).

Source: PhillipCapital Research - 13 Feb 2013