UOB Kay Hian 2015-08-15: ComfortDelgro - 2Q15: Delivering Comfort Amid A Volatile Market. Maintain BUY.

COMFORTDELGRO CORPORATION LTD C52.SI

2Q15: Delivering Comfort Amid A Volatile Market 

  • CD delivered a set of comforting results amid the current volatile Singapore equities market. 
  • Net profits were within our expectations as the group achieved broad-based revenue growth. Noticeably, CD’s core operations remain resilient with the group’s bus and taxi revenue growing 4.1% and 3.3% yoy respectively. 
  • We remain positive on CD’s business outlook. 
  • Maintain BUY with a DCF-based target price of S$3.30


RESULTS 

  • Results were within expectations as 2Q15 and 1H15 net profits represented 25.6% and 47.0% of our full-year estimates respectively. ComfortDelGro’s (CD) revenue growth was broad-based across most key sectors as core businesses improved, with bus, rail and taxi revenue growing 4.1%, 6.8% and 3.3% yoy respectively. 
  • An interim dividend of 4.0 S cents/share was declared. 
  • CD has a dividend policy which requires the group to payout at least 50% of net profit. We are expecting a dividend payout of 8.6 S cents/share in 2015, which implies a yield of 2.9%. 
  • 2015 capex to remain high. We estimate capex requirements of S$550m and S$500m for 2015 and 2016 respectively, mainly for the purchases of buses (2015: S$260m.) and taxis (2015: S$240m). 


ESSENTIALS 


• BSEP bus update. 

  • The Bus Service Enhancement Programme (BSEP) was launched by the Singapore Government in 2012 to finance the purchase of new buses. Under the BSEP Agreement, BSEP Buses are purchased through a loan facility provided by the Land Transport Authority (LTA) which is in turn secured against the BSEP Buses. We understand that on the 31 Jul 15, SBS Transit (SBST), of which CD has 75% ownership in, announced that the LTA will transfer the legal titles of 427 BSEP buses which SBST owns, to itself at a purchase consideration equivalent to the outstanding loan granted of about S$164m. We understand that this transfer will be done based on the buses book value and be completed on 31 Dec 15. 

• In the running for Loyang bus package tender. 

  • Following the Bulim Bus Package, the Loyang Bus routes will be the second set of public bus services to be put up for tender under the Government Contracting Model. This package comprises 22 existing SBST Bus Services, as well as 3 new bus services that will be introduced in the distant future. It is expected to consist of about 400 buses when implemented in 2H16, and grow to about 500 buses in 2021 in tandem with new developments and projected growth in ridership. We note that the winner of the tender would take over operations of all services from SBST and it is highly likely that CD will participate in this tender which closes on the 14 Aug 15. 

• Gross CAPEX increased 74% yoy in 2Q15 as CD purchased additional buses and taxis. 

  • We understand that the bus and taxi fleet expansion accounted for 88% of 2Q15’s S$ 227.3m gross CAPEX. We estimate that CD expanded its taxi fleet by more than 200 taxis in 2Q15 to 16,959 as of 1H15. This increase in number of taxis purchased in comparison to the previous quarter was mainly due to cheaper Certificate of Entitlement (COE). We note that CAT B (Cars above 1600cc) COE prices declined 25.5% between its highs and lows during 2Q15 and CD has capitalised on the lower COE prices to fulfil a majority of its 2015 taxi replacement requirements. CD is estimated to replace 2000-3000 of its taxis annually and has an average taxi age profile of 4.7 years. A taxi’s useful life span is usually 7.5 years. 

• Expecting breakeven for Downtown Line (DTL) in end-16. 

  • We expect the Downtown Line (DTL) stage 2, which comprises of 12 stations, to commence operations on 27 Dec 2015 while ridership continues to gain traction for stage 1 (DTL1). Average daily ridership for DTL1 grew 20.2% yoy to 70,000 passenger trips. In addition, we are not expecting repair and maintenance (R&M) expenses to surprise on the downside. 2Q15 R&M expense of S$61.4m was within our expectations. 

• Fuel hedging updates. 

  • As of 1H15, the group hedged 65% and 26% of its 2015 and 2016 fuel requirements respectively. 


EARNINGS REVISION/RISK 

  • No change in earnings. 
  • Key risks include weaker ridership or lower-than-expected average fare increase at its bus and rail division. Conversely, we see potential upside in positive regulatory changes from areas such as the new rail financing framework. 


VALUATION/RECOMMENDATION 

  • Maintain BUY with a DCF-based target price of S$3.30. CD’s outlook remains resilient as we expect 3-year earnings CAGR of 11%. More importantly, CD is well-positioned for growth through value-accretive overseas acquisitions, supported by its healthy balance sheet. 


SHARE PRICE CATALYST 

  • More accretive overseas acquisitions. 
  • New financing framework for the rail segment.

Andrew Chow CFA | Bennett Lee CAIA | http://research.uobkayhian.com/ UOB KH 2015-08-14
BUY Maintain BUY 3.30 Same 3.30


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