ComfortDelGro Corp Ltd - Phillip Securities 2017-11-13: Strong Cash Generation, Absolute Dividend Level Sustainable

ComfortDelGro Corp Ltd - Phillip Securities 2017-11-13: Strong Cash Generation, Absolute Dividend Level Sustainable COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corp Ltd - Strong Cash Generation, Absolute Dividend Level Sustainable

  • ComfortDelGro's revenue in line with our estimate.
  • PATMI 15.8% better than we expected, due to lower YoY opex that yielded better than expected operating margin.
  • Maintain Buy; lower target price of $2.69 (previously $2.78.)



The positives 


Improved profitability at SBST is making an impact to CDG. 

  • ComfortDelGro (CDG)’s 74.82% stake in SBS Transit (SBST) contributed 10.4% of 3Q17 PATMI, compared to 6.7% contribution in 3Q16. This is on the back of SBST’s 42.1% YoY higher 3Q17 profit and to a lesser extent, CDG’s 8.2% YoY lower PATMI. 
  • We estimate that SBST would have contributed ~9.3% of CDG’s 3Q17 PATMI, had the rest of CDG’s business remained unchanged YoY. 
  • SBST’s profit is set to further increase in 2018 from the opening of DTL3 on 21 October 2017 and takeover of the Seletar bus package from 1Q18.

Lower profit, but cash flow has actually improved: 

  • Absolute dividend level should be sustainable. 
  • 9M17 PAT is 5.1% lower YoY to $277.7 mn. However, free cash flow (net cash from operating activities minus capex) is 29% higher YoY to $194.8 mn. This leads us to believe that the FY16 dividend of 10.3 cents can be maintained this year.


The negatives 


Singapore Taxi business continues to be challenged by private hire vehicles. 

  • Comfort & CityCab taxi fleet is -4.7% QoQ and -12.1% YoY as at end of 3Q17. 3Q17 idle rate was 4.5%, compared to 5% and 3.0-3.5% in 2Q17 and 1Q17 respectively. Fleet size in 4Q17 will see a net reduction as some of the older Sonata taxis are replaced with the hybrid Prius taxi.

Effective 2.2% fare reduction from 29 December will delay the breakeven for DTL.

  • Management estimates that DTL breakeven will be delayed to early 2019. This is also on the premise that 500k average daily ridership can be maintained. The fare reduction only impacts NEL and DTL, as public bus services are already on the government contracting model and do not depend on fare revenue.


Outlook: 

  • Positive Concerns over the contraction in the Singapore Taxi business are valid, but we think the sell down of the stock has been over-done. The Singapore Taxi business remains profitable.
  • While Group profit is lower, free cash flow has actually improved owing to lower Taxi capex. Moreover, both the Singapore public Bus business and DTL are on an asset-light model. DTL3 will make its full quarter contribution from 1Q18 onwards. The Seletar bus package will contribute positively from 1Q18 as well. Consequently, we see PATMI bottoming this year. 
  • Sustainable dividend makes the now 5.2% yield attractive.


Maintain Buy; lower target price of S$2.69 (previously $2.78) 

  • We made some tweaks to our assumptions for the -2.2% fare adjustment (previously assumed -1%) and to the right-sizing of the taxi fleet. Higher WACC of 8.4% used from previous 7.8%, with terminal growth unchanged.


Key Takeaways 

  • Management shared some insights to some of the ongoing issues.

Strategic alliance with Uber 

  • Negotiations are ongoing and nothing material was disclosed.
  • From what we hear, we interpret that if any alliance materialises, it will leverage on Uber’s technology i.e. Uber’s app will be chosen over CDG’s.
  • Some margin may have to be given up in the partnership, as a trade-off to stemming the business contraction.

Transition to the New Rail Financing Framework (NRFF) 

  • Negotiations with LTA are ongoing and confidential.
  • Recall that under the Licence Condition for Rail Services, SBST is contractually obligated to purchase the operating assets for the North-East Line, Punggol LRT and Sengkang LRT from LTA. However this was put on hold due to SMRT’s transition to the NRFF in 2016.
  • Key concern is how the deal will be priced, relative to SMRT’s.

Media report of over 3,000 drivers moving over to Grab 

  • Management clarified that the 3,000 drivers mentioned in the media had not moved over to Grab, but merely downloaded the app.
  • Taxi hirers were paid $100 to download the Grab app and $75 for the first ride they take.
  • Management shared that the actual number of drivers who left is in the “low hundreds”.

UK Bus business 

  • Metroline (London public bus service) revenue is expected to be fairly stable, as Management expect GBP to appreciate against SGD.
  • Stansted Coaches (coach service between Stansted airport and Central London): faces erosion by rail and cheap Uber taxis. The business is being reviewed “carefully”.
  • Scottish Citylink (inter-city coach service from Scotland): facing tough competition from National Express Coaches and other players giving discounts.
  • Having said that, Metroline contributes 90% of the UK Bus business, so the overall UK Bus business should remain stable.




Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2017-11-13
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 2.69 Down 2.780



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