ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-11-13: 9M17 Broadly In Line. Coping Well Amid Revenue Pressure

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-11-13: 9M17 Broadly In Line. Coping Well Amid Revenue Pressure COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - 9M17 Broadly In Line. Coping Well Amid Revenue Pressure

  • ComfortDelGro’s 3Q17 results were in line with our expectations, with 9M17 net profit of S$242m which fell 2% yoy. 9M17 operating profit fell 10% yoy but lower minorities, taxes and higher investment income helped limit the decline. 
  • We trim 2018-19 earnings forecasts by up to 4% to build in more conservative taxi and rail assumptions.
  • Maintain BUY with a lower PE-based target of S$2.25 (previously S$2.34). 
  • A catalyst could be its potential alliance with Uber.



RESULTS


In-line results, lacklustre operating profits offset by minorities, tax and investment income. 

  • ComfortDelGro Corporation’s (CD) 9M17 net profit fell 1.6% yoy to S$242m, broadly in line with our estimate. Though 9M17 accounted for circa 82% of our estimate, 4Q tends to be seasonally weaker and we see more pressure ahead, particularly for its Singapore taxi segment. 
  • Though 9M17 operating profits fell 10% yoy, overall group net profit was supported by lower taxes, lower minorities (after buying out ComfortDelGro Corp Australia), higher investment income and lower contract services. 
  • Other than public transport services and driving centres, all other major segments saw declining 9M17 operating profits – taxi (-17% yoy), automotive engineering (-28% yoy) and vehicle inspection (-4% yoy). Financials remain strong, with CD in a net cash position of S$188m.


ESSENTIALS


Competition intensifying for Singapore taxi. 

  • Taxi idle rate continued to creep up in 3Q17 at 5.4% compared to 5.0% in 2Q17. Management guided that its fleet in 3Q17 averaged 15,800 units, but this is likely to trend down on the higher idle rates and the scrapping of older Hyundai cars. 
  • Nevertheless, management has taken steps to help stem the decline, including the roll-out of an option for fixed fares and lower rentals but with revenue share for its drivers. While 9M17 taxi bookings were down 20% yoy, management shared that 3Q17 bookings were actually up qoq, though no exact numbers were provided.

Public Transport Services (bus and rail) the sole bright spot. 

  • This segment saw 9M17 operating profit grow 0.2% yoy and could see further increases as the Downtown Line (DTL) 3 opened in October. The group hopes that DTL will breakeven in early-19 when average ridership hits 500,000/day. The breakeven for DTL3 has been delayed as fares will be reduced 2.2% from 29 Dec 17. 
  • As for its UK bus operations, Metroline is performing well, with two new routes, but Scottish Citilink is seeing intensifying price competition. 
  • Its operations in Australia are performing well and management sees more M&A opportunities but these would be relatively small M&As.

We think DPS can be still sustained with zero taxi FCF contribution. 

  • Assuming the 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 to remain at around S$0.16-17/share. 
  • At this level, we note CD will still be able to sustain the current 2017-19F DPS of S$0.10/share (4.7-4.9% yield) as the expected cashflow savings from the taxi segment is expected to be substantial as historically, the capex for taxis and motor vehicles tend to be cS$300m p.a.

Awaiting Uber alliance. 

  • The alliance may include collaboration in management of fleet vehicles, booking software solutions in Singapore and also taxis being made available on Uber's app. 
  • Management hopes to conclude discussions by the end of the year.


EARNINGS REVISION/RISK


Trimming 2018-19 earnings forecasts on more conservative assumptions. 

  • We raise our 2017 earnings forecast slightly by 3% as we refine our cost assumptions, specifically lower contract services to account for lower volume of cashless transactions as well as lower TransitLink expenses following the bus contracting model (BCM) transition. 
  • Meanwhile, we lower our 2018-19 earnings forecasts by up to 4% to build in a more conservative taxi and rail assumptions. 
  • Key risks include:
    1. worse-than-expected impact on taxi revenue due to third-party taxi apps and difficulty in attracting taxi drivers,
    2. weaker-than-expected UK economy and a weaker currency, and
    3. rising fuel costs.


VALUATION/RECOMMENDATION


Maintain BUY with a lower PE-based target price of S$2.25 (previously S$2.34).

  • Our target price is based on a long-term average PE of 16.6x. At the current price, we believe CD’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, with the next upcoming line being the Jurong Region Line (expected completion: 2025).


SHARE PRICE CATALYST

  • More accretive and aggressive overseas acquisitions.
  • Rising dividend payout.




Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.25 Down 2.340



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