ComfortDelGro Corporation - UOB Kay Hian 2015-10-16: Demand Remains Strong Despite Rising Competition

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - Asian Gems Conference 2015: Demand Remains Strong Despite Rising Competition

We hosted ComfortDelGro at our Asian Gems Conference. Despite rising competition from taxi apps such as Uber, demand for ComfortDelGro’s taxi services is unaffected.
We believe taxi drivers will continue to find CD’s value proposition attractive. The transition to an asset-light bus model could see the group gradually raise its dividend payout.
Maintain BUY and DCF-based target price of S$3.30.

Management of ComfortDelGro (CD) attended our Asian Gems Conference in Singapore recently. This report highlights the key takeaways from CD’s presentation at the conference.

A concern highlighted by investors was the potential impact of rising competition from the likes of Uber. Compounding the concerns were a recent news article (10 October) by The Straits Times on the high number of idle taxis owned by Trans-Cab lying in the yard. CD highlighted it has not seen any impact on taxi demand as its booking call volumes remain high and taxi utilisation is optimal at close to 99%. However, the medium-term concern, in our view, could be a potential shortage of drivers for the incumbents, such as Trans-Cab, SMRT and even CD. CD shared that the availability of alternatives such as Uber has reduced the waiting time for new tax drivers from 3-4 weeks to less than one week. In addition, we understand that Trans-Cab’s low taxi utilisation is a company-specific issue and partially due to its acquisition of Smart Taxis and its ageing taxi fleet.

Despite the dominant position of CD in the taxi segment, we believe management is unlikely to stand still ahead of rising competition. We believe taxi drivers will continue to find CD’s value proposition attractive in areas such as diesel subsidies, insurance coverage paid by CD and high call bookings. In addition, we believe the authorities could be relooking at potential issues such as regulations on quality, suitability of drivers, safety and insurance matters. Also, we believe taxi operators such as CD could also consider reviewing its incentive programme for drivers.

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. While there is the potential for special dividends, we believe CD’s preference is for a sustainable growth in dividends. Hence, the transition to an asset-light bus model could see the group gradually raise its dividend payout.

For the second bus tender (Loyang), the LTA has shortlisted 8 parties out of an initial 10 tenders. CD's subsidiary SBS Transit put in a bid of S$545.9m and came out the fifth highest. Note that the final winner will be assessed on price as well as quality. While CD did not put in the lowest price, we are not unduly negative and see this as a reflection of rational pricing.

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 16% ytd gain in share price, we think CD’s relative valuation remain attractive at 18.5x 2016F PE vs SMRT’s 18.8x. We note CD’s 2016F ROE of 14.3% is also higher than SMRT’s 11.9%. In our view, CD is a dependable solid blue chip with a quality franchise.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-16

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