We  hosted  ComfortDelGro  (CD)  for  a  post  2Q12  results  luncheon. Management's  tone  was  positive:  (1)  Continues  to  see  opportunities  in Singapore  taxi  market  (2)  Confident  in  meeting  taxi  availability  standards  (3) BSEP  to  have  neutral  impact  to  CD's  earnings  (4)  China  and  Australia  are targets for future expansion.

Well  positioned  as  the  dominant  Taxi  player  in  Singapore.  Management shared that despite rising COE prices, it still believes in opportunities for growth in  Singapore's  taxi  market  in  the  form  of  cashless  transaction  volumes  and  taxi bookings.  CD  has  not  increased  rental  rates  for  its  newest  batch  of  taxis  and believes that operating margins of 11-12% still makes it an attractive business to
hold on to.

CD  likely  to  have  less  difficulty  meeting  taxi  availability  standards.  On recent steps the government is taking to improve taxi availability, CD shared that about  80%  of  its  taxi  fleet  runs  on  two  shifts  (two  drivers  sharing  rental  of  one taxi).  It  believes  that  its  performance  on  taxi  availability  standards  would  likely exceed the rest of the industry that is likely to have less than 50% of fleet running on two shifts.

'Earnings  neutral'  in  Bus  Services  Enhancement  Programme  (BSEP).  CD notes that although the government will be paying for buses as well as operating expenses  under  the  BSEP,  these  will  be  taken  onto  CD's  books  under  assets and  balanced  with  a  liability  to  the  government.  A  revenue  grant  will  also  be provided to offset against the depreciation of these assets.

Though  CD  will  benefit  from  cost  efficiencies  from  the  increased  fleet  size,  the government  will  charge  CD  its  share  of  cost  on  an  average  cost  basis.  The recent  increase  in  bus  driver  wages  will  also  be  borne  by  the  government  and there will not be anymore wage increase in Jan 2013. The BSEP is expected to have  a  neutral  impact  to  CD's  earnings  and  CD  could  receive  reimbursement through various income streams such as waived depot charges.

China  and  Australia  targeted  for  expansion.  CD  has  highlighted  China  and Australia  as  possible  destinations  for  overseas  expansion  opportunities. Management  commented  that  acquisitions  should  ideally  range  between  S$50-S$100m  but  added that  even  a  more  sizable  transaction  in  the  likes  of  a  few hundred  million  dollars  would  be  achievable.  CD  targets  investments  that  can generate an IRR of mid teens over a 10 year period.

Advantages  of  cost  plus  bus  models.  Both  of  CD's  bus  operations  in  UK/Ireland  and Australia  run  on  a  cost  plus  model  which  means  that  CD's  earnings  are  dependent  on distance travelled and are not subject to fare/ridership risks. Australia's operating margins are typically stronger (bus at 19% and taxi at 25%) versus UK/Ireland (bus at 8% and taxi at 4%) mainly because of the competitiveness of a relatively more mature London market.

Source: OSK