ComfortDelGro Corporation CFA Global Investment Research Challenge Crystal Research (Asia Pacific Region ‐ Singapore) April 2009 1 DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Corporate Profile ComfortDelGro Corporation World’s 2nd largest land transport Multiple company in fleet acquisitions in size 7 countries Merger of Comfort Group & DelGro Corp in 2003 2 Conclusion Domestic Earnings Depression Ahead Momentum for • Three different valuation International Growth Impeded approaches suggest further downside of 18‐25% from current levels Expensive Valuation: • SELL reiterated Premium Unjustified • TtTarget price set at $1.10 based on DCF –FCFF approach 3 DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Others Australia 04%0.4% $2.30 Domestic:7% Earnings China Depression8% Ahead Singapore $2.00 57% $1.70 $1.40 ComfortDelgro $1.10 ? UK/Ireland 27% $0.80 International: Impetus Expensive Valuation: for Growth Hindered Premium Unjustified 4 DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Singapore Market Analysis Bus Revenue Facing Significant Headwinds Significant Headwinds in Bus Market Erosion of Taxi Rental Margins IntroduceSingapore BusCompetitive & Rail Ridership tendering % Growth Disintegration of Land Transport 15% new ppylayers of bus routes duoppyoly structure Immaterial Rail Au thority Contribution Master Plan GreaterEast rail‐ Westpenetration Rail Substitution effectNorth of new‐East rail Rail 10% cannibalisingLine extension bus ridership lines from 2009Line onwards opens 5% 0% 96 97 98 99 00 01 02 03 04 05 06 07 08 ‐5% Rail Bus ‐10% 5 Source: Land Transport Authority (Singapore), Department of Statistics DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Singapore Market Analysis Erosion of Margins from Taxi Rental Significant Falling demand Highest taxi Comfort drivers Headwinds in High idle rates in Bus Market during rental cost in leaving industry & Comfort’s large downturn industry switching operators fleet Erosion of Taxi Rental Margins 26 100% 21 26 24 25 90% T ips o rr 25 tal T Immaterial Rail 80% Contribution 13 % 13 12 12 70% of 24 60% Taxi Passenger f 23 50% Market oo 40% No. 66 62 64 63 22 30% Shar Daily 20% e 21 10% 20 0% 2005 2006 2007 2008 6 Source: Land Transport Authority(Singapore) ComfortDelGro SMRT Others Taxi Daily Ridership DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Singapore Market Analysis North East Line (NEL) Housing projects Boost if Comfort rail ridership saw 15% to build critical wins Downtown Significant Headwinds in growth in 2008 mass along NEL Line bid Bus Market Rail Revenue only 3.3% of Comfort’s Total Revenue Erosion of Taxi Rental Margins Difficult to Project the Success of Downtown Line Bid 3.3% Immaterial Rail 20.4% Contribution Singapore Rail Overseas 42.3% VICOM Singapore Taxi Singapore Bus 31.7% 2.3% 7 Source: Company data DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS $2.30 Australia $2.00 (7%) Singapore UK $1.70 (57%) (27%) China $1.40 (8%) ComfortDelgro $1.10 ? $0.80 Domestic: Earnings International: Impetus Expensive Valuation: Depression Ahead for Growth Hindered Premium Unjustified 8 DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Overseas Market Analysis UK Business Faces Earnings Depression Comfort will not Declining taxi UK bus market reached UK Earnings benefit from increased ridership further Under Pressure saturation point bus ridership depresses earnings Inconsequential Positioning in Market ShareUK Taxi of London’s Revenue Bus Routes Australia 90 Selkent, 4%‐5.9%Travel YoY London, 6% Heavy Regulation in Metrobus, China 6% 75 Others, 17% Acquisition Strategy Not m London Delivering £' Central & General, 60 Arriva, 19% 15% First 45 London, Metroline, East 13% 12% London, 8% FY06 FY07 FY08 FY09E 9 Source: Company data, Transport for London DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Overseas Market Analysis Comfort’s Inconsequential Positioning in Australia Comfort only Only 25% of bus market Translation UK Earnings Under Pressure operates buses in the privatised, minimal organic losses from UK suburbs growth potential and Australia Inconsequential Positioning in GBP against SGD UK & Australia FY08 Revenue Australia Sydney3.2 2.9 S$m 1000 /SGD Melbourne Heavy PP 262.6 101.7 GB FX translation Regulation in 2.3 800 effect China 2 Acquisition Comfort600 Strategy Not operating Delivering 400 852.4 1.4 AUD against SGD in the 1.3 suburbs200 66.6 1.2 /SGD 203.1 DD 1.1 AU 0 1 0.9 UK Australia Source: Company Data, 10 NSW Ministry of Transport DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Overseas Market Analysis Chinese government stops Comfort’s China taxi fleet size issuing new taxi licenses remains stagnant for years UK Earnings Under Pressure Taxi Fleet in China by Provinces ((05‘05‐'08) Inconsequential Positioning in Beijing Australia Shenyang Heavy Regulation in Nanning China Nanjing 2008 Shanghai Acquisition 2007 Strategy Not Delivering Jilin 2006 Chengdu 2005 Xiamen, Hengyang, Yantai Suzhou 0 1000 2000 3000 4000 5000 11 Source: Company data DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Overseas Market Analysis Inorganic Growth Strategy Unable to Meet Expectations Comfort’s acquisition Non yield‐accretive UK Earnings Difficult Acquisition criteria concentrates acquisitions do not Under Pressure Environment on fleet size add value Inconsequential Positioning in Australia Heavy Regulation in China Acquisition Strategy Not Delivering Decreasing acquisition over the years 12 Source: Company data DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS $2.30 Australia $2.00 (7%) Singapore UK $1.70 (57%) (27%) China $1.40 (8%) ComfortDelgro $1.10 ? $0.80 Domestic: Earnings International: Impetus Expensive Valuation: Depression Ahead for Growth Hindered Premium Unjustified 13 DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS FY2008A FY2009E FY2010E FY2011E FY2012E Total Revenue 3125.6 3136.4 3197.2 3291.1 3394.2 0.0 Revenue growth FY2009 at 05%0.5%, FY2010 to FY2012 Less: Operating Expenses 2583.9 2603.2 2656.6 2736.0 2818.7 at an average of 2.7% EBITDA 541.7 533.2 540.6 555.1 575.4 Less: Depreciation & Amortization 263.7 263.5 268.6 276.5 285.1 Higher depreciation as EBIT 278.0 269.7 272.1 278.7 290.3 296.1 more vehicle purchases *(1‐Tax Rate) 228.0 221.2 225.8 231.3 241.0 245.8 and acquisitions are made Add: Depreciation & Amortization 263.7 263.5 268.6 276.5 285.1 Less: CAPEX 283.0 255.3 278.0 283.5 293.0 Less: Change in NOWC ‐9.3 ‐7.2 ‐0.3 ‐0.5 ‐0.8 Average CAPEX per annum at $280mil from FY2009 to Free Cashflow 218.0 236.6 216.6 224.7 233.9 194.1 FY2012 Terminal Value 2799.9 Total 218.0 236.6 216.6 224.7 233.9 2994.0 Present Value @ FY2008 $2,677m Terminal Growth: 2% Discounted Add: FY2009 Cash & Securities 460m Less: Total Debt 424m Terminal ROIC: 9.5% Cash flow Less: Minorities 420m Valuation WACC 9.1% Equity Value $2,293m Model Total Outstanding Shares 2085.6m Implied value per share $1.10 14 DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS 16 FY09 Estimated Peer Group PE 16 14 14 12 12 Industry average: 10.1x 10 10 8 8 6 6 4 4 2 2 0 0 SMRT CORP LTD COMFORTDELGRO CABCHARGE AUST ARRIVA PLC GO‐AHEAD GROUP FIRSTGROUP PLC STAGECOACH 15 Source: Bloomberg Estimates DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS 7 Term. Growth: 1% Term. Growth: 3% FY09 WACC: 9.5% WACC: 8.5% % Downside 6 Methodology Target ($1.35 as of 27Mar09) FCFF Price 5 Free Cash Flow $1.10 18.5% Growth: 1% Growth: 3% to Firm 4 Cost of Equity: 11% Cost of Equity: 9% DDM 3 Dividend $1.01 25.2% Discount Model 2 PE: 9x PE: 13x Price Earning P/E Multiples Multiples – $1.05 22.2% 1 Industry Peers 0 Target Price Current Price $0.90 $1.00 $1.10 $1.20 $1.30 $1.40 16 DOMESTIC INTERNATIONAL RISK REWARD INTRODUCTION VALUATION OUTLOOK STRATEGY ANALYSIS Likelihood? Justification of likelihood Impact on earnings? Medium Lost previous rail bid despite being the hot contender Winning Bid of Negligible Rail line only begins operation in FY2013 New Rail Line ‐ ents Historically rail took at least 3 years to be profitable vv Downtown Line E NPV impact limited by time horizon and uncertainties High Government will begin deregulation in mid‐09 Deregulation of Double edged sword More players will be introduced into bus market omestic DD Bus Routes Incumbent will fhfight to retain their bus routes Full effect of de‐regulation will only be seen after 2011 Low Global economies in deep recession Early Global nts Economic Consensus view that economy will only pikick up >FY2009 Eve Recovery >8% UK and Singapore taxi business might pick up, favourable FX movement might occur tional Low Protectionist government policies in downturn aa More Cumbersome approval process of regulators Acquisition Deals Available Indeterminate Takes time to be profitable through inorganic growth Intern 17 Conclusion Domestic Earnings Depression Ahead Momentum for • Three different valuation International Growth Impeded approaches suggest further downside of 18‐25% from current levels Expensive Valuation: • SELL reiterated Premium Unjustified • TtTarget price set at $1.10 based on DCF –FCFF approach 18 Appendix Presentation Valuation Model Further Analysis