With bus routes in Singapore open to tendering contracts by end-2009,
and the award of the Downtown Line (DTL) contract expected over the
next six to 12 months, contestability will increasingly be a key theme
within the land transport space.
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Our analyses imply more favourable risk-reward for ComfortDelGro
(CD), with the earnings impact from a restructuring in the domestic bus
market likely to be limited, given 1) its stronger overseas growth profile
and more diversified earnings base, and 2) a higher probability of it
winning the upcoming DTL contract over rival SMRT.
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As we move closer towards the award of the DTL contract, we see it as
a potential catalyst for the land transport players. Near term, we also
see last year’s currency headwinds developing into tailwinds for CD,
on the back of the strengthening GBP and AUD, with its bus operations
in the UK and Australia at 29% of total operating profit. Fuel hedges in
FY09 should also drive cost savings for CD, thus boosting profitability.
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With profitability looking up for CD, we have raised earnings by 4%,
and see an 18% core earnings CAGR from FY08-10E. We raise our
DCF-based target price to S$1.60, and our rating to OUTPERFORM. We
favour CD over SMRT, which trades at 17x P/E, and which we remain at
UNDERPERFORM.