ComfortDelgro - DBS Research 2017-08-14: 2Q17 Drop In Profit Was Expected

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelgro - 2Q17 Drop In Profit Was Expected

• ComfortDelgro's 2Q17 net profit was lower but within expectations.
• Challenges on taxi ops continues, partially mitigated by public transport.
• Penciled in continued contraction in taxi fleet, trimmed FY17F/18F earnings by 2%/ 8%.
• Dividend yield to support share price; maintain HOLD, TP revised to S$2.33.

Maintain HOLD, TP revised to S$2.33. 

• While we like ComfortDelgro (CD)’s resilience and geographical diversification, we are projecting that growth trajectory to take a step back to register a dip compared its average rate of c.6% seen in the past 5 years, particularly as a result of its shrinking taxi fleet. 
• We maintain our HOLD call with a revised TP at S$2.33, as we trimmed our FY17/18F earnings by 2%/ 8% on the back of a contraction in its taxi fleet through to FY18F, before stabilising in FY19F. This is partially mitigated by improved contribution from Singapore public transport services arising from the bus contracting model and turnaround in its rail operations with increased ridership from the opening of Downtown Line Stage 3. 
• We believe CD’s yield of 4.7% with potential for higher payout could support its share price.

Where we differ? High DPS despite lower profits. 

• We are at the lower end of consensus in terms of our earnings forecasts on the back of contraction in taxi fleet. However, we believe DPS will continue to increase on the back of higher payout ratio, providing yields of close to c.5%, thus supporting the share price.

Potential catalyst. 

• Recent headwinds and focus has been on taxi operations arising from private hire car competition. A more rational business behaviour by these companies and/or regulatory changes could aid in the operations for taxis. Inorganic growth acquisitions could also mitigate weakness in taxis.

WHAT’S NEW

2Q17 drop in profit was expected. Maintain HOLD for higher dividend payout ratio. 

• We maintain our HOLD recommendation with a revised TP of S$2.33 as we revised our FY17F/18F forecasts down by 2%/ 8%. 
• While CD’s taxi operations continue to face challenges arising from competition from private hire car, a better earnings profile from its Singapore bus operations could partially mitigate the fall in taxi’s contribution. 
• In addition, we project CD would raise its dividend payout ratio on the back of a lower capex requirement. Based on our projections, the counter trades at 4.7%/ 4.9% yield (FY17F/ 18F), which could provide support for share price. 
• With lower capex requirements, we believe the group is able to increase its payout ratio. We project a payout ratio of 75%/ 80% for FY17F/18F given its still strong free cash flow.

2Q17 results within expectations. 

• While CD posted a 6.8% yo-y drop in 2Q17 net profit to S$79.4m, this was within our expectations. Group revenue was S$987.2m (-3.4% y-o-y).
• The drop in profit came about from lower contribution from its taxi operations and auto engineering business. 1H17 net profit accounts for c.50% of FY17F earnings. Despite a drop in profits, a higher interim dividend of 4.35 Scts was declared, up from 4.25 Scts in 1H16. Hence, CD’s payout ratio increased marginally to 58.1%, from 57.8% last year.

Group revenue dipped by 3.4% (-S$35.1m). 

• Save for Public Transport Services and Driving Centre segments, all other business segments registered negative growth. 
• Aside from the drop in underlying business (-S$16.9m), FX translation impact contributed S$18.2m to the drop in revenue. 
• Not unexpectedly, its taxi segment posted a drop of 10.7% y-o-y (S$33m) to S$303.9m on the back of competition resulting in contraction of its fleet in Singapore.

EBIT margins dipped marginally. 

• Group operating costs decreased a tad lower (-2.7% y-o-y to S$875.3m). Increases in staff costs (+1.3% to S$368.2m) and depreciation (+5.4% to S$102.3m) were mitigated by lower contract services (- 10%), fuel and electricity (-6.7%), taxi drivers’ benefits (- 34%) and repairs and maintenance (-2.6%), among others.
• Unfortunately, the drop in costs was smaller than the decline at the topline. As a result, operating profit margins dipped by 0.3ppts to 11.3% (from 12% in 2Q16). As a result, operating profit dropped by 9% y-o-y to S$111.9m.

Right-sizing of taxi fleet larger than expected. 

• With the competition from the private car hire industry, the total taxi fleet in Singapore continues to contract at a faster pace compared to our earlier expectations. 
• In the past few months, CD has continued to reduce and right-size its taxi fleet, and as of latest figure from the LTA (June 2017), stood at 15,556 taxis, to keep its unhired rate low. Its fleet size is down by 7.5% and 8.9% from Dec’16 and Apr’16, respectively.

Not fully replacing taxis that reach statutory lifespan. 

• Under Singapore’s regulations, a statutory life of a taxi stands at 8 years. Based on Comfort and CityCab’s total fleet of about 16,000 taxis, there are over 2,000 taxis reaching the 8-year mark annually on average. Given the current challenges, we understand that the company is introducing lesser new taxis than those it retires. 
• Arising from this and the shift towards bus contracting model in Singapore, 1H17 cash capex dropped by 45% y-o-y to S$96m, from S$176m the same period last year.

SBSTransit to pick up some slag in taxi’s contribution. 

• While the group’s taxi operations are facing headwinds, we expect its Singapore bus operations could pick up some of the slack.
• Since the transition over to the Government Bus Contracting Model (GCM) from 1 Sep 2016, its 75% owned subsidiary, SBSTransit (SBST) posted 1H17 net income of S$22.9m, implying strong c.50% y-o-y growth from the same period a year back. 
• The transition to the GCM is still under a year, and while visibility of the margins from Singapore buses is uncertain, an improvement in margins and operating results is a certainty, in our view.

MRT DTL3 – 21 Oct 2017. 

• In addition, with the opening of Downtown Line Stage 3 from 21 Oct 2017, we expect its rail ridership to improve markedly, and provide revenue stream.
• This should lower the losses from rail, and likely to aid in a turnaround and contribute positively by mid-FY18, in our view.

Implied yield at 4.7%; Free cashflow improvement from lower capex could lead to higher dividend payout, providing support to share price. 

• Our earlier thesis has been a higher dividend payout by CD on the back of its net cash position and lower capital expenditure requirements, particularly with the transition into the bus contracting model in Singapore. 
• With a lower capex requirement from buses and slower replacement of taxis, we believe a higher dividend payout could ensue notwithstanding a lower profit level. 
• We are projecting payout ratio to increase to 75% and 80% for FY17F and FY18F, respectively, from 70% in FY16F.

Valuation & Forecasts 

Reduced forecasts to reflect smaller taxi fleet. 

• Further to our earlier report in May 2017, we have further dialed back our forecasts by 2%/ 8% for FY17F/18F to reflect the smaller taxi fleet. 
• We are now penciling its Singapore taxi fleet to contract by 7%/ 3% in FY17F/18F (to 15,800 and 15,200 taxis), while average revenue per taxi to dip by 3% each year. As a result, we project EPS to fall by 1%/4% for FY17F/18F. 
• We project negative growth rate should reverse from FY19F. We believe its yield of 4.7% based on conservative payout ratio of 75% for FY17F (given its low capex requirements) would provide some support for share price.

Our TP is trimmed to S$2.33, based on average of PE and DCF. 

• We have pegged the PE valuation at 13x FY18F EPS, implying -1 standard deviation of its historical trading band to account for a slower growth profile. 
• Our DCF is valuation is based on WACC of 9.3% and terminal growth rate of 0.5%.
• Our TP of S$2.33 implies a PE of 15.9x/ 16.6x FY17F/18F PE, around its historical trading average multiple.

Risks to our view.

• Upside risks to our view:
  1. group’s ability to leverage on its balance sheet and deliver acquisitions to further supplement its growth;
  2. Further regulatory changes in favour of taxi companies or reduced competition by private car hire companies could also turn the sentiment in favour of taxi companies such as CD;
  3. contract wins such as the tender for Singapore Thomson-East Coast Line (TEL) expected sometime in 2017 (with the line opening in stages from 2019).

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-14

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.33 Down 2.780