Comfort Delgro (CD) announced a S$75.7m profit on Wednesday and Macquarie Equities Research (MER) released a research report titled “Best of both worlds” on the same day. MER gave an ‘Outperform’ rating on the stock with a 12-month price target of $2.95. Some excerpts from the report can be seen below.

CD’s increasingly balanced business model (~50:50 EBIT from domestic :foreign) combined with growth drivers in both worlds (positive policy changes in domestic business and organic/inorganic growth in foreign business) makes it one of the most diversified stocks to own in Singapore, in MER’s view.
 
CD reported robust S$75.7m profit (+10% YoY) in 2Q14 results, 8% ahead of MER’s estimates, driven by a much stronger than estimated top-line growth.
 
2Q14 results highlights:
Revenues cross S$1bn/qtr mark for the first time: This is the highest ever quarterly revenue posted by CD, driven primarily by significant gain in UK business (+54% YoY) and SG business (+8% YoY).
 
UK business continues to ramp up sequentially: UK business revenues and EBIT have gone up sequentially since 1Q13 due to enhancements in the bus and taxi businesses and favourable currency exchange rates.
 
Overseas business profitability continues rising: Overseas business contributed 51% to EBIT in 2Q14 (despite much lower 41% of revenues) vs 47% in 2Q13. This is driven by higher margins in the UK and Australia.
 
Interim dividend payout increased: Interim DPS was increased to 3.75cents/share from 3cents/share in 2Q13. MER’s full year estimate is 7.5cents.
 
Key drivers from here on:
Driver 1: Bus asset purchases could lead to robust special dividends: The government is due to announce the purchase value of CD’s bus assets which are around S$675m book value currently. This could result in robust one-off dividend payouts ranging from S$9-28cents/share, in MER’s view.
 
Driver 2: Overseas expansion could gather pace: Although CD already has a net cash balance sheet, extra cash from bus asset sales will enable CD to make larger ticket acquisitions overseas in MER’s view.
 
Driver 3: Recent ‘bus policy changes’ positive impact from Oct 2016: CD’s Singapore bus business (which contributes 19% to total group revenues) will see a huge uplift in EBIT margins starting Oct 2016 (from current 1.7% to ~10%), thus boosting group profits and compressing multiples, in MER’s view.
 
Price catalyst
12-month price target: S$2.95 based on a DCF methodology.
 
Catalyst: Bus asset purchase announcements.
 
MER’s action and recommendation
Limited downside risk in buying the stock at current level: Despite CD being up 30% YTD (vs +3% for STI Index), MER thinks there is value in buying the stock now with potential catalysts like a large special dividend, overseas growth expansion and possible new MRT line tender wins in Singapore.

Source: Macquarie Research - 15 Aug 2014