ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-06-27: Assessing The Downside Risk On Singapore Taxis

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-06-27: Assessing The Downside Risk On Singapore Taxis COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - Assessing The Downside Risk On Singapore Taxis

  • Given the structural decline of the taxi industry as competitive pressure from private hire cars mounts, we assess the downside risk on Singapore taxis. 
  • Our scenario analysis under various methodologies and assumptions suggests a valuation range of S$1.98-2.37/share for ComfortDelgro
  • We reduce our earnings forecasts by up to 5.4% to reflect a higher rate of fleet decline. 
  • Maintain HOLD with a lower target price of S$2.37 (previously S$2.47). Entry price: S$2.20.



WHAT’S NEW

  • ComfortDelGro’s (CD) share price has declined 5.5% ytd, which we reckon is largely due to continued concerns of competitive pressure from private hire car operators. This report highlights various scenario analysis on potential downside risk to share price, with a valuation range of S$1.98-2.37 for CD.


STOCK IMPACT


Potential share price downside if CD does not utilise its cash. 

  • We see potential downside risk to share price if CD does not utilise cash flow generation to either carry out M&A or increase dividend payouts to shareholders. 
  • Given the structural decline of the taxi business and a lack of compelling growth catalysts, we reckon a higher dividend payout is necessary to compensate earnings risks. 
  • Based on our sensitivity analysis, a dividend yield of 4.2-5.0% could translate into a 2018F valuation of S$2.00-2.37/share for CD (2018F DPS of S$0.10, or a 70% payout). 
  • Referencing a select group of high-yielding peers from ST Engineering, SPH, SATS as well as telcos, which are trading at an average FY18F dividend yield of 4.6%, this could imply a downside valuation of S$2.17/share for CD.

What is the implied residual value of taxi? 

  • At CD’s current market value, excluding the public transport as well as the other segments (automotive engineering, bus station, car inspection, car leasing and rental, driving centre), the implied residual value of taxi is estimated at S$0.20/share, or 8% of CD’s current market price. 
  • Based on our sensitivity analysis, should CD’s taxi earnings decline 5-50% yoy in 2018, this could translate into 2018F PE of 3.9-7.5x for the taxi business. Our base case is a 6.3% yoy decline for the taxi business, which implies 2018F PE of 4.0x. 
  • In our view, this is not expensive and could indicate that a majority of the downside risk for the taxi business has been priced in.

Taxi decline and impact on our PE-based valuation. 

  • We currently estimate CD’s 2018 taxi earnings at S$109.5m (-6.3% yoy). If the 2018 taxi earnings decline exceeds our estimate and earnings fall 10-50% yoy, CD could be trading at a PE-based valuation range of S$1.98-2.34/share, pegged at long-term average PE of 16.7x .

CD’s taxi fleet declined sharper than expected. 

  • In the latest Apr 17 industry data released by the Land Transport Authority (LTA), CD’s taxi fleet recorded a decline of 5.7% ytd to 15,863 (as at Dec 16: 16,281). 
  • We understand fleet downsizing is part of the group’s strategy to rein in idle rate to an optimal level (estimated 1-3%). However, as the contraction was steeper than what we had expected, we have increased our 2017-18 fleet assumptions to an average annual decline of 3-5% yoy (from 2%). Based on our sensitivity analysis, we estimate every 1% decline in fleet size to reduce earnings by 2%.

Rental fleet growing, taxi daily mileage declining. 

  • As of Apr 17, the number of rental cars had increased 78% yoy. Correspondingly, the average daily taxi mileage for both one-shift and two-shift had also declined 7/8% yoy respectively. This also implies that taxi drivers are getting less income on a daily basis. 
  • We believe the average daily mileage for taxis will continue to decline going forward, a reflection of the growing supply of drivers.


EARNINGS REVISION/RISK


Reduce earnings forecasts by up to 5.4% on change in fleet assumption. 

  • We reduce our 2017-19 net profit forecasts by up to 5.4% to factor in higher annual fleet decline rates of 3-5% (previously 2%).


VALUATION/RECOMMENDATION

  • Maintain HOLD with a lower PE-based target price of S$2.37, pegged at the long-term average PE of 16.7x. 
  • While we continue to like management’s execution capability and track record, we believe the operating outlook for the taxi segment remains challenging against the backdrop of competitive pressure from rail-hailing apps. 
  • Nevertheless, CD’s move to an asset-light rail-and-bus model would lead to lower capex, which could suggest potential increases in dividend payout to mitigate the lack of growth from the tougher taxi outlook. Entry price is S$2.20.


SHARE PRICE CATALYST

  • More earnings-accretive and aggressive overseas acquisitions.




Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-27
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.370 Down 2.470



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