ComfortDelGro (CD SP) - Maybank Kim Eng 2016-11-13: Overreaction to Fare Cuts

ComfortDelGro (CD SP) - Maybank Kim Eng 2016-11-13: Overreaction to Fare Cuts COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro (CD SP) - Overreaction to Fare Cuts


Maintain HOLD; Decent yield play 

  • 3Q16 inline aided by resilient taxi earnings amid heightened competition. 
  • Stronger SG performance offset overseas weakness. The negative share price reaction to the impending fare cuts looks overdone, in our view. CDG offers a decent 4.4% dividend yield at current levels. 
  • Nonetheless, we maintain HOLD as street expectations remain too high and we see scope for disappointment. Our unchanged SGD2.63 TP is based on 17x FY17 EPS, a slight premium to the historical average to reflect a positive change in bus model. 
  • Accretive acquisitions may provide upside to our forecasts.


9M16 tracking our FY forecast 

  • 9M16 made up 77% of our full year forecasts. 
  • Unfavourable FX was the main reason for a 3% YoY decline in 3Q sales. However, this is not a concern as it will enjoy a similar cost relief. 
  • Furthermore, the slight dip in EBIT was also affected by a SGD3.8m one-off charge relating to its earlier bid for London Overground that should not recur.


Taxi earnings holding up, despite challenges 

  • The substantial pick up in the market rental fleet (3Q16: +7,500) has provided more alternatives to leasing a taxi(45,900 rental fleet = 1.7x 27,700 taxis in Singapore). 
  • Industry wide operating indicators have also showed a weakening trend, with lesser trips made by drivers and lower number of licences issued. 
  • Despite the industry headwinds, CDG’s taxi earnings remain resilient. Stronger SG earnings from fleet renewal, more cashless transactions, and better cost control offset overseas weakness.


Overreaction to fare cuts? 

  • The stock fell by 12% over the past month in what appears to be a negative reaction to the fare cut announced on 27 Oct. This may be an overreaction, in our view. 
  • While fare revenue for its rail operations will be affected by the 4.2% fare cut and lower underground fares aligned to above-ground fares, the Public Transport Council’s guidance of a SGD8.9m revenue impact to SBST’s rail operations looks manageable. 
  • Furthermore, cost relief from a broader deflationary environment should mitigate the downside to earnings. 
  • Most importantly, its Singapore bus operations are already on a fare-independent model and no longer impacted by the fare cuts.


Updates to tracker on private-hire car market 

  • We provide an update to our estimates of the number of private-hire cars in Singapore, which was first highlighted in our previous note ComfortDelGro: Buyers Beware, dated 5 Apr 2016. Latest data on the number of Sole-Proprietorships and Partnerships (SPP) for the Transport & Storage segment showed that there continue to be a pick-up recent months. This brings our estimate of the number of private-hire cars to 13,800.
  • The substantial pick up in the number of rental cars (3Q16: +7,500) provides more alternatives to leasing a regular taxi. Industry wide operating indicators also showed a weakening trend for taxis: 
    1. declining number of taxi licences issued; and 
    2. declining daily trips made by taxi drivers.

Limitations and assumptions in our methodology:

  • SPPs formed due to non-private hire car drivers remain constant at its historical average of 92 per month. In reality, the number of SPPs formed for other purposes will fluctuate depending on the business cycle.
  • Each SPP formed is for one private-hire car driver. Even though one company formed can be used for more than one vehicle, most drivers would register their own company for ease of billing.
  • All drivers who registered a company for this purpose remain active. In reality, not all are active as there may be some part time drivers. For example, a student may register to drive on the Uber platform for just a month during his vacation. There may also be drivers who stop driving after some time.
  • Our count does not include limousine car drivers who drive for Uber/Grab. This is because they are considered employees of the limousine companies and are not required to register a separate company.


Swing Factors 


Upside

  • Better-than-expected bus profitability.
  • Successful bids for new rail lines in Singapore.
  • Value-enhancing acquisitions of overseas business.

Downside

  • Declines in taxi utilisation or rental rates. 
  • Overpaying for acquisitions.
  • Higher labour and energy costs.







Derrick Heng CFA Maybank Kim Eng | John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-13
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 2.630 Same 2.630




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