ComfortDelGro - 1Q17 Competition Eroding Taxi Profit
- 1Q17 core net profit was below our expectations, at 20% of our full-year forecast.
- The miss was due to declining taxi profit due to competition from Uber and Grab.
- 1Q17 reported net profit was helped by special dividend from investment, excluding which core net profit fell 3% yoy to S$71.3m (1Q16: S$73.4m).
- Group profitability should improve from 2Q17 onwards, with full-quarter contribution from a recent acquisition and fresh contribution from DTL III expected in 2H17.
- We cut our FY17-19F core EPS by 7-8% to reflect the expected lower taxi profit ahead and downgrade ComfortDelGro from Add to Hold, with a lower TP of S$2.78.
1Q17 core net profit below expectations
- Group 1Q17 core net profit was below our expectations, at 20% of our full-year forecast. The miss was due mainly to the faster-than-expected decline in taxi profit, as the business continues to see stiff competition from Uber and Grab.
- 1Q17 reported net profit of S$82.5m was helped by a special dividend of S$11.2m received from its 9.6% stake in Cabcharge Australia. Excluding the special dividend, group core net profit was 3% lower yoy at S$71.3m vs. S$73.4m in 1Q16.
Taxi profit eroded by stiff competition
- Operating profit of the taxi business fell S$4.7m or 12% yoy to S$33.8m in 1Q17 (1Q16: S$38.5m) due to reduced taxi fleet size (average 16.2k in 1Q17 vs. c.17k in 1Q16) and higher taxi idling (c.3.5% in 1Q17 vs. zero idling rate in 1Q16).
- While we note ComfortDelGro has been doing better than its smaller taxi peers in terms of both its fleet management and controlled taxi idling rate, we think the group’s taxi profit is likely to remain under pressure in the near term due to stiff competition from Uber and Grab.
Singapore bus performance exceeded management expectations
- Operating profit of Singapore public transport segment rose 18.1% yoy to S$13m in 1Q17 vs. S$11m in 1Q16. The improvement was due to the higher revenue and better margin of the Singapore bus business under the new contracting model (effective Sep 16).
- Group rail operation was still in a loss-making position in 1Q17 due to the start-up cost related to the Downtown Line (DTL) stage III, which, according to the management, is on track to commence operations in the middle of 2H17.
Overseas bus remained upbeat, though marred by FX translation
- The underlying business of the group’s overseas bus operation remained upbeat in 1Q17. The segment’s lower operating profit of S$26.2m in 1Q17 (1Q16: S$29.3m) was only due to the adverse FX translation from the weakened £ post Brexit vote.
- Despite the lower operating profit yoy, the segment’s 1Q net profit was lifted by the half-quarter contribution of S$3.2m from the additional 49% stake in ComfortDelGro Cabcharge (CDC, the acquisition was completed in Feb 17).
FY17-19F core EPS cut by 7-8%, still 2% overall growth in FY17F
- We cut our FY17-19F core EPS by 7-8% due to lower taxi profit projection as a result of the continued competition from Uber and Grab.
- Nevertheless, we still forecast 2% yoy net profit growth in FY17F, underpinned by the contribution from the additional stake in CDC and the anticipated turnaround of the DTL upon stage III commencing operations.
Downgrade ComfortDelGro from Add to Hold
- In line with the EPS cut, we lower our FY17F DCF-based target price to S$2.78 (WACC: 7.0%) and downgrade ComfortDelGro from Add to Hold.
- Upside risks include possible earnings-accretive M&As while downside risks include further deteriorating taxi profit