ComfortDelGro Corporation - Public Transport Services Growth Aid
- As CD offers:
- Steady growth in earnings despite competitive headwinds;
- Strong FCF generation aided by declining capex;
- The ability to undertake inorganic growth aided by a strong net cash balance sheet;
- Gradual rise in dividend payout ratio to 80% (4.3-5.8% yields),
- We now expect taxi revenue to remain unchanged over the forecast period, as growth would be supported by improving contributions from its public transport services (ie trains and buses).
Change in focus for taxis.
- While growth may have slowed down, ComfortDelGro Corp (CD) has been able to maintain its taxi business’ margins.
- Management plans to extend the life of existing taxis to their 8-year limits and is guiding for 500 taxis to be replaced in 2017. While this would lead to slower rise in taxi rentals, capex would be lowered as well.
- CD plans to keep the taxi idle rate low and has already introduced schemes to retain drivers on the system (2016 idle rate: 1.4%).
- We now estimate a steady decline in taxi fleet size, with idle rate gradually increasing to 3% by 2019. Current taxi business CEO Mr Yang Ban Seng is to succeed Mr Kua Hong Pak as Group CEO from 1 May.
Buses and trains to support growth.
- We see strong revenue visibility from the local bus business via the government contracting model (GCM), higher revenue from the Australian bus wing and improving rail revenue from improved ridership amidst Downtown Line 3’s opening later this year that should support earnings growth.
- CD has merged disclosure of its bus and rail businesses into public transport services. While we do understand competitive reasons for reduced disclosures, it makes it difficult to better estimate the outlook for each business.
- CD has increased dividend payout to 70% in 2016 (2015: 64%). While it is reviewing inorganic growth opportunities, the firm does not expect to undertake any large M&As anytime soon.
- We expect CD to gradually increase its dividend payout ratio to 80%, translating into a 5.8% yield in 2019.
- We lower 2017-2018 earnings by 10-14% to account for lower revenue contributions from the taxi business.
- We expect CD to deliver 7.5% profit growth during 2016-2019, which is in line with its 10-year and 5-year profit CAGRs of 7.4% and 6.1% respectively.