8 surprising business revelations from ComfortDelGro

Sydney competitors have been "under-pricing".

According to Nomura, it had hosted Mr. Choo Chek Siew, Group Financial Officer; and Mr. Choo Peng Yen, Group IR & Special Projects Officer; for a CNY results lunch.

Questions raised by investors were largely focused on the company’s Singapore operations and around issues such as cost pressures, fare increases and rail operations.

Here are key takeaways from the results lunch:

On cost pressures in Singapore bus segment: Management expects cost increases in FY13F to normalise back to an average of 4-5%.

On fare increases: The group has no clarity on fare increases but believe that a fare hike, if any, will only likely materialise in 2H2013. Management maintains that a fare increase will be necessary to maintain a profitable bus business as advertisement and rental revenues will not be able to grow sufficiently to fully offset cost increases over the longer
term.

On Downtown Line: Management expects the Downtown Line (DTL) to be profitable sometime in the middle of Stage 2. In the meantime, management expects costs due to the DTL to pick up in FY13F as it gets closer towards the commencement of operations (end-2013).

On Northeast Line: The group expects repair and maintenance cost to step up in FY13F. To that end, the group will hire more people. However, this is complementary with the roll-out of the DTL, as these new hires could be trained on the NEL platform and eventually be transferred to the new DTL.

On taxi business: Due to the high COEs, the group will be prudent in expanding its fleet. Management noted that some smaller operator(s) have already stopped replacing their decommissioned vehicles, which in effect is an implicit exit from the market given the minimum fleet size requirements by the authorities.

On China: Management expects growth in China to be primarily organic through the addition of new taxi licenses. Management expects some cities such as Nanjing to issue term licenses in 2013, which the company hopes to secure.

On UK: The group expects operations to remain stable, with margins for FY13F to be in the vicinity of 7-8%.

On Australia: Management remains positive on the Australian market with potential privatisation of the public bus market as a positive.

Management noted that some competitors in the Sydney market have been under-pricing and the group is unwilling to chase the market if margins drop to a level which does not make economic sense.

Utility type returns in the mid- to high single digits region could be an acceptable level, depending on the terms and conditions of the contracts.