• 1Q16 largely in-line
• May see slowdown in taxi growth
• Favourable hedging to help

1Q16 growth driven by core businesses

ComfortDelGro (CDG) started FY16 with no surprises, as 1Q16 revenue grew 3.3% YoY to S$995.6m, driven mainly by Bus (+3.0%), Rail (+27.5%), and Taxi (+3.7%) segments, but partially offset by Automotive Engineering Services (-10.1%) segment on lower prices for the sale of diesel to taxi hirers.

1Q16 operating expenses rose 3.0% YoY to S$886.2m mainly driven by higher staff costs (+7.9%), higher payments for contract services (+6.1%), and higher repairs and maintenance costs (12.4%) but offset by lower fuel and electricity costs (- 24.8%) and lower materials and consumables costs (-24.8%).

Consequently, 1Q16 PATMI came in largely within expectations as it grew 8.6% to S$73.4m and formed 21.8% of our FY16 forecast. Note that first quarter has historically been CDG’s weakest quarter of any calendar year.

Focus on transition to GCM by Sep-16

There are four key takeaways from the earnings conference call yesterday. Firstly, while DTL will continue to drive revenue growth, we expect it to breakeven only after phase 3 starts in 2017 due to slower than expected ridership growth.

Secondly, at only ~25% hedged for its Singapore bus business’ FY16 diesel needs, we expect to see more material decline in energy expenses if oil prices remain at current levels. Thirdly, while the third bus package is yet to be released for bidding, management noted negotiations with LTA is still on track for it to transit to the new bus government contracting model (GCM) by 1 Sep, which may see divestment of CDG’s buses to LTA before the transition.

The divestment will free up cash flow, which may lead to higher dividend payout and allow for accretive overseas acquisitions. Lastly, while taxi hire-out rate is still 100%, management noted the historically strong queue for taxi rentals has declined to none by 1Q16, which may lead to slowdown in taxi fleet growth as a result.

Maintain BUY

With in-line results, we keep our forecasts largely unchanged. Noting recent weakness in its share price, reiterate BUY rating on CDG with the same FV of S$3.40.

Source: OCBC Research - 13 May 2016