ComfortDelGro Corporation - UOB Kay Hian Research 2015-10-08: A Stellar Outperformer

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - A Stellar Outperformer

While the FSSTI suffered a 12.3% loss ytd, ComfortDelGro’s (CD) share price has gained 16.2%. The outperformance is due to the group’s consistent earnings growth.
We think CD makes an exceptional defensive play. In addition to the imminent bus restructuring, Singapore’s ambition for a car-light society is expected to boost ridership growth.
We remain positive on CD’s business outlook. Maintain BUY and DCF-based target price of S$3.30.

Volatility is likely to persist in the Singapore equity market and we think CD makes an exceptional defensive play. In addition to the imminent bus restructuring, Singapore’s ambition for a car-light society is deemed positively as commuters are likely to be incentivised to switch out of private-vehicle usage, and this should boost public ridership.

Against an uncertain external outlook and weak earnings visibility, we expect the FSSTI to remain volatile. We believe ComfortDelGro’s (CD) resilient fundamentals and diversified earnings are likely to provide refuge for investors. In comparison with 39% of our corporate coverage which have reported earnings below our estimates in 2Q15, CD delivered earnings within our and consensus expectations.
Noticeably, growth for CD’s core operations remains resilient as the group recorded 4.1%, 3.3% and 6.8% yoy growth in its bus, taxi and rail segments respectively in 2Q15. We expect fundamentals to remain intact and CD to deliver a 3-year earnings CAGR of 11.2%.

Newly appointed transport minister Mr Khaw Boon Wan seeks to enhance the accessibility and reliability of Singapore’s public transport sector as to promote a car-light society. This bodes positively for CD as commuters are likely to be incentivised to switch out of private vehicle usage, and this should boost public ridership.
Despite the imminent bus restructuring in 2H16, we note CD will still benefit from any increase in rail ridership. The Downtown Line (DTL) stage 2, which comprises 12 stations, is expected to commence operations on 27 Dec 15 while ridership for stage 1 (DTL1) continues to gain traction. We estimate a 5% decline in total car ownership will result in a S$2.8m increase in FY16 rail earnings for CD. We expect potential upside in ridership growth should key initiatives be successful in changing behavioural patterns in the long term.

Although not definitive, we think the record Land Transport Authority (LTA) bond issuance of S$2.5b in 2015 equips the LTA to make the planned bus purchases as scheduled. We understand Singapore bus operations account for about 18% of CD’s total revenue and operating performance is expected to improve, given the transition to a new government contracting mode.
In view of the estimated operating margin of 8-10% for the new government contracting model, we expect the public bus industry to turn profitable in 2H16.

We estimate the bus contracting model could lead to a special dividend payout of 21.6-25.0 S cents/share, assuming:
1. the government buys bus assets from SBS Transit at 0.9-1.0x P/B,
2. SBS Transit pays down 50% of its outstanding debt, and
3. the remaining net cash gets fully paid out as a special dividend.
Currently, we have not assumed the special dividends and our dividend yields of 2.8- 3.1% for 2015-16 are based on a dividend payout of 54%.

While the taxi operating environment in Singapore has become more competitive since the introduction of independent thirdparty taxi booking applications such as Uber, we think there is only a marginal impact on CD’s taxi business in the near term. According to our channel checks, current taxi hire out rate for CD’s remains largely unaffected at about 99%. (The other 1% of the unhired taxi fleet is due to down time for fleet renewal purposes.)
We expect the group to receive 35m-36m taxi bookings in 2015, of which half would be made through its taxi booking app.

None. Key risks include weaker ridership at its rail division and lower-than-expected margins, given the transition to a government contracting model for the public bus industry.

Despite the ytd share price gain, we think CD’s relative valuations remain attractive at 18.7x 2016F PE vs SMRT’s 19.5x. We note CD’s 2016F ROE of 14.4% is also higher than SMRT’s 11.7%. In our view, CD is a dependable solid blue chips with a quality franchise.

Andrew Chow CFA UOB Kay Hian | Bennett Lee CAIA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-02

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.30 Same 3.30