• DTL to drive revenue growth ahead
• To benefit from lower energy costs
• Look out for impending bus divestment

FY15 within expectations

ComfortDelGro (CDG) ended FY15 steadily, as FY15 revenue grew 1.5% to S$4.11b, driven mainly by Bus (+3.1%), Rail (+8.4%), and Taxi (+3.4%) segments, but partially offset by Automotive Engineering Services (-13.6%) segment on lower prices for the sale of diesel to taxi hirers. While rail revenue recorded solid growth, operating profit plunged 57.9% due to higher staff costs incurred in preparation for DTL2, which launched on 27 Dec 15. CDG’s FY15 operating expenses rose 1.4% to S$3.66b mainly driven by higher staff costs (+3.3%) and higher depreciation (+10.1%) but offset by lower fuel and electricity costs (8.5%) and lower materials and consumables (-11.7%). Consequently, FY15 PATMI came in within our expectations as it grew 6.5% to S$301.9m and formed 100.7% of our FY15 forecast.

FY16 – a year filled with positives

There are three key reasons why we like CDG. Firstly, we expect the launch of revenue service of DTL2 on 27 Dec to drive revenue growth and offset start-up as well as operating costs. We expect this launch of DTL2 (12 stations spanning 16.6km) to have much larger revenue impact compared to when DTL1 (six stations spanning 4.3km) was launched in 2013. Secondly, while energy savings in FY15 were limited by its large hedging positions, we expect CDG to see more material benefits from lower fuel and electricity costs in FY16 as management guided for lower and more favourable hedging positions for the year. Thirdly, we still expect bus divestment to occur 2H16 as part of the transition to government contracting model, and believe LTA will purchase CDG’s bus assets at NBV. The divestment will free up cash flow, which may lead to special dividend payout and allow for accretive overseas acquisitions. Refer to our report dated 5 Jan 16 for our views on the impending bus divestment.

Maintain BUY

With the stated positives already within expectations, we keep our forecasts largely unchanged. Consequently, our DDM-derived FV remains at S$3.40 and noting recent weakness in its share price, we reiterate BUY rating on CDG.

Source: OCBC Research - 15 Feb 2016