ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2016-11-14: 9M16 Earnings In Line Despite Trying Times

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2016-11-14: 9M16 Earnings In Line Despite Trying Times COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - 9M16 Earnings In Line Despite Trying Times

  • ComfortDelGro Corporation’s (CD) 9M16 results were in line, with net profit of S$245.9m, up 5.2% yoy, as costs were well contained. 
  • We continue to like CD for its defensive qualities and diversified earnings stream. Moreover, we believe there is dividend payout upside as Singapore’s bus and rail segments transit to an asset-light model. 
  • Nevertheless, we remain cognizant of a more challenging medium-term outlook for CD, and have factored in weaker growth assumption as a result, but believe most negatives have been priced in. 
  • Maintain BUY with a lower PE-based target price of S$2.90.


RESULTS


9M16 results in line. 

  • ComfortDelGro Corporation’s (CD) 9M16 results were in line with our and market expectations. 
  • 9M16 net profit of S$245.9m grew 5.2% yoy, underpinned by prudent cost management, which resulted in a slight 0.3ppt rise in operating margin to 11.9%.

Maintaining cost well. 

  • 9M16 operating cost declined 0.8% yoy, primarily supported by lower fuel and electricity costs (-23.4% yoy) as well as materials and consumables cost (-27.9% yoy), which helped offset the higher repair/maintenance costs (+7.6% yoy) and staff cost (+4.7% yoy). 
  • Within key segments, taxi EBIT rose 4.0% yoy whereas other segments such as bus and rail experienced lower EBIT due to higher staff and repairs/maintenance costs as well as currency impact from the overseas segment.


ESSENTIALS


Impact of 4.2% fare reduction on rail business. 

  • In Oct 16, the Land & Transport Authority (LTA) announced a fare reduction of 4.2% for both bus and train from 30 Dec 16. We forecast the impact on CD’s 2017 rail revenue estimate at -5%, which would translate into an overall net profit impact of 3% for 2017.

Strong momentum in rail ridership. 

  • 9M16 rail revenue increased 26.1% yoy on the back of strong ridership momentum growth from both the North-East Line (NEL) and the Downtown Line (DTL). 
  • Notably, the average daily ridership for the DTL almost doubled to 234,000, while the NEL saw a 5.3% yoy increase to 566,000. 
  • Meanwhile, DTL3 is slated for opening in Sep 17, where we understand CD is currently in the early stage of hiring and incurring start-up costs. Despite the strong growth in ridership, we understand ridership is still tracking below expectation and DTL continues to be loss-making.
  • Nevertheless, we expect ridership growth momentum to become stronger after the opening of DTL3.

Taxi continued to fare well. 

  • Despite threats from private hire-car operators, the group’s taxi operations remained well supported (9M16 revenue up 2.2% yoy). 
  • Management indicated that hire-out rate in Singapore remains at 99%, similar to previous quarter’s guidance. However, we do note that the fleet size growth was relatively flattish (+0.5% yoy), which may be telling of challenges in recruiting new drivers.

UK bus tendering may get competitive but still manageable. 

  • As expected, UK bus revenue was mostly impacted by the currency translation (S$38.7m), which dragged 3Q16 group bus revenue down 7.3% yoy. 
  • Operationally, given budget pressure on the London transport sector, we believe the contract bidding environment may get more competitive, which may impact CD’s UK bus revenue. 
  • Nevertheless, we think margin impact could be minimal and maintained at 6-8%, given continued growth in the London population, which suggest the need for more bus services and expansion of network in the region.


EARNINGS REVISION/RISK

  • We reduce our 2016-18 net profit forecasts by up to 7% to factor in: 
    1. the 4.2% fare reduction in 2017, 
    2. lower taxi fleet growth assumption of 1.5% (from 2%), and 
    3. a more competitive tender environment for UK bus contracts by reducing UK bus revenue growth assumption to 0.5% (from 1%), offset by an increase in 2016F rail revenue due to a 14% upward revision in ridership assumption for DTL.
  • Key risks include weaker economic outlook in UK and rising fuel costs. Another risk is negative impact on taxi revenue due to 3rd party taxi apps as well as a difficulty in attracting younger taxi drivers.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower PE-based target price of S$2.90 (previously S$3.11).
  • Based on 17.9x 2017F PE, which is a 10% premium to the 10-year mean PE, our target price stood at S$2.90. 
  • We continue to like CD for its defensive qualities as well as diversified earnings stream. Also, we believe there is dividend payout upside as its Singapore bus and rail segments transit to an asset-light model. 
  • Nevertheless, given the more challenging medium-term outlook, we have factored in softer growth assumptions but believe most negatives have been priced in.


SHARE PRICE CATALYST

  • More accretive overseas acquisitions.
  • Rising dividend payout.




Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-14
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.90 Down 3.110




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