ComfortDelgro - OCBC Investment 2017-01-04: No Reason To Panic

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelgro - No Reason To Panic

• Overseas acquisition positive on bottom line.
• Revenue sharing scheme for taxi hirers.
• Attractive risk-reward at current price levels.

To acquire remaining 49% stake in CDC for ~S$196m 

• ComfortDelGro (CDG) recently announced the acquisition of the remaining 49% stake in ComfortDelGro Cabcharge Pty Ltd (CDC) for a cash consideration of A$186m (~S$196m), based on a valuation of 4.6x FY15 EBITDA of CDC. 
• With a fleet of 1,712 buses, CDC is one of the largest private bus operators in New South Wales and Victoria, Australia. The acquisition (subject to regulatory approval) is expected to complete by 1Q17, and will be financed by both internal funds and bank borrowings. 
• We believe CDG will be able to comfortably fund the acquisition with its strong balance sheet (net cash position of S$259.0m as at end-3Q16).

Taking steps to maintain taxi hired-out rate 

• Trans-cab announced last week taxi rental rate cuts ranging between -22% and -35% for one-man operation taxi hirers. 
• We believe Transcab wants to achieve lower fleet idle rate (~11%) in the shortest time possible. However, we do not expect CDG to also engage in direct rental rate cuts as: 
  1. its taxi fleet idle rate is still close to 0%, and 
  2. its continuous fleet renewal programme helps justify the higher rental rates. 
• That said, CDG is also not sitting still as it is gradually shifting taxi operations from fixed rental rate to revenue risk sharing model. 
• In short, taxi hirers pay up to 50% lesser in rental rates but CDG takes a cut in their fare revenues (i.e. a variation to Grab/Uber model). We believe this will help ease the hirers’ cost burden, which greatly reduces risk of hirers switching out, and with CDG still (partially or fully) compensated through the revenue sharing mechanism, we believe the impact of revenue decline will at least be partially mitigated.

Reiterate BUY on lower FV of S$2.95 

• Consequently, as we: 
  1. factor in the Australian acquisition, 
  2. cut FY17/18F taxi operating profit by 3.0%/6.8%, and 
  3. increase our risk-free rate assumption from 2.0% to 2.6% on higher interest rate environment, 
  our DCF-derived FV drops from S$3.08 to S$2.95. 
• Even if we assume a (highly unlikely) 50% plunge in taxi revenue in FY18, our FV drops to S$2.49. Hence, with attractive risk-reward at current price levels, we reiterate BUY on CDG.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-01-04

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 2.95 Down 3.080