Last Thursday, Comfort Delgro reported third quarter profit of S$81m n, 5% higher than the same period last year, and 5% ahead of Macquarie Equities Research’s (MER) estimates. The results led MER to conclude that Comfort Delgro is one of the best managed and stable companies in Singapore and a safe investment in the present volatile environment.
 
In its research report released on 14 November, MER explain why….

Here are excerpts from the MER report:
 
Comfort Delgro reported a solid set of results yet again with profits at S$81m, +5% year-on-year (YoY) and 5% ahead of MER estimates. Broad based growth continued as Singapore contributed 54% to earnings before interest and tax (EBIT) and overseas business contributed 46%.
 
Singapore business is becoming more profitable by the day: Singapore contributed 60% to total revenues and 54% to EBIT (versus 49% in third quarter of 2013). Revenues in both – Singapore rail and Singapore bus businesses – grew due to higher ridership. While bus ridership increased by 3%, rail ridership on the North East Line increased to 527,000 versus 502,000 and in DTL to 68,000 from 58,000 in 2Q14. Overall, Singapore business EBIT margin increased to 10.7% from 8.6-9.9% in last 3 quarters.
 
UK business benefited while Australia suffered due to forex translation: While SGD gained against the British pound in the quarter, it declined against the Australian dollar. Thus, UK EBIT was up 17% YoY while Australian business EBIT was down 33% YoY.
 
9M14 performance extremely strong, ahead of expectations: In the first nine months of 2014 (9M14), revenues have grown 9% for the group overall and profits by 8%. This is ahead of MER’s and street’s 4-5% estimates.

Catalysts ahead:
Special dividends when the money for bus sale comes in: The bus policy was announced in May 2014 and the transition of the buses is due to happen by Oct 2016. Between now and then, the government has to pay the money to buy back the bus assets to CD. Once the money comes in, MER believes Comfort Delgro will be distributing special dividends.

Two new MRT line tender wins in first half of 2015: The Thomson and eastern line tenders are out and the winner will be announced in the first half of 2015. If Comfort Delgro wins one or both, that will be a catalyst for the stock in MER’s view.

More expansion overseas: Comfort Delgro has net cash of S$15m as of end September. With forward cash flow improving and more money coming in, MER thinks there is a possibility of Comfort Delgro using this cash to expand more overseas.

Action and recommendation
A stable, steady growth company with inflection point in end-2016: MER views Comfort Delgro as one of the best managed and stable companies in Singapore. For investors looking for a safe investment in a volatile environment, MER recommends Comfort Delgro. In addition, there is the comfort of 3 to 4% dividend yield.
 
MER has an Outperform rating on Comfort Delgro. MER increased their earnings estimates of Comfort Delgro by 4% for the next two years and increased their 12-month target price on the stock by 3% to S$3.05, based on a discounted cash flow methodology.

Source: Macquarie Research - 17 Nov 2014