Singapore government agency divests ComfortDelgro stake

Singapore Labour Foundation takes advantage of recent share price spurt to offload one third of its stake.
Singapore-listed ComfortDelgroÆs largest shareholder has sold one third of its stake in the company for S$193.44 million ($119 million) as part of a portfolio diversification exercise.

Citigroup arranged the sale which saw Singapore Labour Foundation (SLF) offload 124 million shares in the passenger transport company at S$1.56 apiece, or a 6.02% discount to TuesdayÆs (February 14) closing price of $1.66.

The shares were originally offered in a range between $1.56 and 1.62 and the low-end pricing is said to reflect the fact that many investors were unwilling to pay too much for a stock primarily viewed as a defensive play, albeit with growth opportunities from its overseas operations.

The sale attracted about 35 investors, who submitted orders for approximately 1.3 times the amount of shares on offer. About half of the investors were believed to be new to the stock, while the remainder took the opportunity to top up their existing holdings.

About two thirds of the shares went to long-only funds, with the rest allocated to hedge funds. Geographically, Asian investors bought 50% of the stock, while 35% went to Europe and 15% to offshore US accounts.

ComfortDelgro, which was formed in March 2003 from the merger of Singaporean companies Comfort Group and DelGro Corp, is the controlling shareholder of SBS Transit, whic is the largest public bus and taxi operator in Singapore. It also ranks as the second largest listed passenger land transport company in the world with a fleet of close to 40,000 vehicles.

The transaction accounted for about 6% of the company and SLFÆs stake will drop to 12.2% from 18.2% following the sale. Prior to the sale, SLFÆs investments were heavily geared towards this one stock and people familiar with the sale say a decision had been made to rebalance and diversify the portfolio a bit more.

The share price has doubled from S$0.79 since the integrated company was listed in its new form and has recently had a strong run underpinned by a decline in oil prices. The stock has gained 13.5% since the beginning of November, which makes this a good time to sell, observers comment.

SLF - which is a government statutory body and an affiliate to the National Trades Union Congress that aims to improve the welfare of union members - will remain the single largest shareholder of ComfortDelgro, however, and will retain its two board seats.

ôWe're a committed long-term shareholder of ComfortDegro and we have full confidence in the management," say SLF CEO Nancy Teo. "As such, we have made a commitment that we will not divest any more shares within the next two years."

The sale was completed two days after company reported record revenues and profit for 2005 - in line with consensus expectations. Despite the record absolute numbers, the bottom line increased only marginally from the previous year, however, as the company battled against high oil prices and fierce competition in the Singaporean taxi market.

In the February 13 earnings statement, the company said these same two issues could make 2006 another challenging year. According to one analyst the company has not hedged any of its fuel requirements as management believes prices are likely to trend downwards.

Operating profit from the taxi segment fell 18% in 2005, although the drop was cushioned by a larger contribution from the China operations, Citigroup noted in a research note. The idle rate of Singapore taxis also declined slightly to 5% in the fourth quarter from 7% in the third, even as the number of drivers increased.

ôWe believe the worst is over for the group and see it sustaining double-digit growth from next year underpinned by its overseas investments,ö the research note said.

The taxi segment is the second largest revenue driver for the group and accounted for 28% of the top line last year, compared with 53% for bus segment. The company is also active within rail, car rental and leasing, automotive engineering and maintenance, vehicle testing and diesel trading.

Revenues increased by 7.4% to S$2.3 billion in 2005, which was mainly due to the bus operations in the UK and Shenyang, higher sales volumes of diesel, the inclusion of three months worth of revenues from a newly acquired subsidiary in Australia and an increase in rail revenue. Net profit edged up 1.3% to S$201.9 million.

Analysts generally expect a solid performance from the company in the coming year as well, and their average target price for the stock is S$1.75, which translates into 10% upside from current levels. The share price dropped 4.22% to S$1.59 yesterday in the wake of the discounted share sale.

ôItÆs a company that delivers very stable income growth and offers a dividend yield of about 5%,ö one observer concludes. ôGiven we have a mixed view on the Singapore market, this is a nice defensive stock to own.ö

In addition, the companyÆs expansion into China, where it currently has bus and taxi operations across 11 cities, is exepected to be positive for its future growth. ComfortDelgro aims to derive 50% of its revenues from its operations abroad within five years, up from 38% at present and 35% at the end of 2004.

China accounted for 6.5% of total turnover last year, which was broadly in line with 2004, and dwarfed by the 29.5% contribution from the UK and the 62% generated in Singapore. The company also has operations in the Ireland, Australia, Malaysia and Vietnam.

Credit Suisse downgraded the stock to ôneutralö from ôoutperformö following the earnings announcement, but kept the target price unchanged at S$1.70. According to a fund manager, the analyst noted that he still likes ComfortDelgroÆs fundamentals and sees potential for higher dividends, but sees limited upside for the share price as this has already been priced in.

CS forecasts a dividend yield of 5% in 2006 and 5.2% in 2007. Citigroup, which has a buy on the stock and a target price of S$1.80, projects a yield of 6.2% in 2006 and 6.1% in 2007.

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