ComfortDelGro (CD SP) - UOB Kay Hian 2017-09-29: Dividends Sustainable, Even Without Singapore Taxi Segment. Upgrade To BUY

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-09-29: Dividends Sustainable, Even Without Singapore Taxi Segment. Upgrade To BUY COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - Dividends Sustainable, Even Without Singapore Taxi Segment. Upgrade To BUY

  • We upgrade ComfortDelGro to BUY after its 17% year-to-date share price decline that has priced in the disruption impacting its Singapore taxi operations. 
  • Even without the free cash flow from Singapore taxi operations, we estimate that ComfortDelGro can sustain its current DPS, which would imply a 2017-19 dividend yield of 4.7-4.9%. 
  • Potential catalysts include an accretive alliance with Uber and ridership growth from DTL3. 
  • Upgrade to BUY with a PE-based target of S$2.34 (previously S$2.37).



WHAT’S NEW

Taxi woes discounted. 

  • We upgrade ComfortDelGro to BUY after its 17% ytd share price decline. In our view, the de-rating has mostly reflected the disruption from private car hires.
  • Assuming an unlikely event of zero valuation for its Singapore taxi operations would suggest a valuation of S$1.63-2.00/CD share, which is a downside of 2-20 % from current levels.


STOCK IMPACT


DPS can be still sustained even with zero taxi FCF contribution. 

  • Assuming a worst case scenario where we strip out the entire cashflow contribution from taxi segment (estimated to be S$0.05-0.08/share), we estimate 2017-19F FCF for the rest of the business to remain around S$0.16-17/share. At this level, we note ComfortDelGro will still be able to sustain the current 2017-19 DPS of S$0.10/share (4.7-4.9% yield) as the expected cashflow savings from taxi is expected to be substantial. 
  • Historically, the capex for taxis and motor vehicles tend to be around S$300m per annum. 

Strong free cash flow upon transition to asset-light model. 

  • Despite the negative structural change in the taxi business, we note that the positive structural change in buses and rails in the form of being more asset light has improved ComfortDelGro’s FCF. 
  • Upon the transition of the public transport to asset light, we currently project FCF/share to improve from S$0.15/share in 2016 to S$0.22-0.26/share for 2017-19 (including Singapore taxi).


STOCK IMPACT


Valuation excluding taxi sees minimal downside risk. 

  • Excluding the taxi business, valuation for ComfortDelGro could range from S$1.63/share to S$2/share, where the lower range is from the PE basis and the latter a DCF basis. This implies a downside of 2-20% from current levels. However, we see very minimal downside risk to current share price, as taxi earnings will unlikely be zero in the next 2-3 years and the long-term outlook for public infrastructure (bus and MRT) in Singapore would still be very resilient.

Expect improving rail profitability on DTL3 opening. 

  • We note that ComfortDelGro’s rail ridership has been rising steadily since DTL1 first opened on 22 Dec 13, where average daily rail ridership has increased by about 50% to 970,856 based on the latest data available as of Jul 17. With DTL3 opening in 21 October, we believe rail ridership will experience significant ridership growth due to the network effect. 
  • Recall DTL3 will be the longest stretch out of the three stages of DTL, with 21 km in length and 16 stations which will serve 33 education centres and several highly-populated housing estates such as Tampines and Bedok.

Potential Uber alliance as a near-term catalyst. 

  • ComfortDelGro has signed an exclusivity letter with Uber to discuss forming a strategic alliance. Besides making taxis available on Uber’s booking app, ComfortDelGro’s alliance with Uber may also focus on mobility services such as fleet management and booking software solutions. We believe this could even extend to other parts of ComfortDelGro’s operating segments, such as automotive engineering services or inspection/testing services. 
  • ComfortDelGro’s inspection/testing arm, VICOM, does inspection for private hire cars, such as decal inspection as well as decal installation and registration.


EARNINGS REVISION/RISK

  • Adjust 2017-19 earnings downwards slightly by up to 4%, as we build in a higher rate of fleet decline of 5-8% (previously 2-5%). This would see taxi revenue decline from S$1341m in 2016 to S$1127m in 2019.


VALUATION/RECOMMENDATION


Upgrade to BUY with PE-based target price of S$2.34 (previously S$2.37), based on long-term average PE of 16.6x. 

  • At the current price, we believe ComfortDelGro’s shares have mostly reflected the disruption from private hire cars. We see limited downside risk to current share price as taxi earnings will unlikely be zero in the next 2-3 years and the long-term outlook for public infrastructure (bus and MRT) in Singapore will still be very resilient. 
  • We see potential upside to rail earnings, given the government’s plans to double rail network by 2030, where the next upcoming line will be the Jurong Region Line (expected completion: 2025).


SHARE PRICE CATALYST

  • Completion of strategic alliance with Uber.
  • More accretive and aggressive overseas acquisitions.
  • Rising dividend payout.
  • Higher-than-expected rail ridership




Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-29
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 2.34 Down 2.370



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