ComfortDelGro - CIMB Research 2015-11-16: Uber & Grab: cannot shake it off

ComfortDelGro - CIMB Research 2015-11-16: Uber & Grab: cannot shake it off COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro - Uber & Grab: cannot shake it off 

  • 9M15 net profit was slightly below expectations, at 74% of our FY15 forecast (4Q seasonally weak), mainly due to the headcount build-up for DTL stage II. 
  • 3Q15 net profit rose 5% yoy to S$85m, led by growth of UK bus operations. 
  • No concrete evidence of taxi profitability in jeopardy yet but significantly slower revenue growth in 3Q15 may be an early sign. 
  • Positives from bus reform and contribution from DTL stage II are likely priced in. 
  • Downgrade from Add to Hold, with lower TP of S$3.17, based on CY16 DCF. 

■ 3Q15: revenue rose 1% yoy, net profit increased 5% yoy 

  • 3Q15 group revenue rose 1% yoy to S$1.05bn (3Q14: S$1.04bn). 
  • Operating expenses rose by a narrower 0.6% yoy to S$919m in 3Q15 (3Q14: S$913m) due mainly to the decline in energy expenses, partly offset by higher staff costs and depreciation. As a result, 3Q15 group operating profit rose 4.1% yoy to S$129m (3Q14: S$124m). 
  • Net profit rose 5.4% yoy to S$85m in 3Q15 (3Q14: S$81m). 

■ Increased overseas contribution 

  • Overseas operating profit rose 11% yoy to S$64m in 3Q15 (3Q14: S$58m) due mainly to the expansion in the UK and Australia bus operations, partly offset by the unfavourable FX translation from the weakened A$. Singapore operating profit declined 2% yoy to S$65m in 3Q15 (3Q14: S$64m) due mainly to the profit decline in automotive engineering and rail, partly offset by the growth in taxi and bus profits. 

■ Taxi: is slowing revenue growth a start? 

  • Tax revenue growth has slowed significantly in the past few quarters. We believe that the slowdown was mainly caused by the slower growth in cashless transaction income, which is largely a pass-through on CD’s P&L but is a proxy to taxi bookings, in our view. 
  • Core taxi hiring profitability has not been affected much YTD, as evidenced by the 9% yoy growth in 9M15 taxi operating profit and supported by management’s assurance of zero taxi idling rate today. 

■ Equilibrium disrupted, market power likely undermined 

  • Although its profitability in 9M15 appeared unaffected, we believe that the rise of Uber and GrabCar presents a threat to CD’s established market power, as management observed a much shorter queue of applicants for its taxis. 
  • Our ground checks revealed that CD is now more active in pushing its referral incentive scheme to recruit taxi drivers. We foresee increasing difficulties for CD to enforce its taxi hirers’ compliance with the LTA’s Taxi Availability Standard, a prerequisite for annual fleet expansion of up to 2%. 

■ Daunting Uber & Grab threat, downgrade from Add to Hold 

  • We cut FY15F EPS by 3% for higher staff cost for DTL stage II and lower FY16-17F EPS by 7% as we cut taxi revenue growth assumptions from 6-7% to 2%. 
  • We estimate that every 1% rise in taxi idle rate would cause FY16-17F EPS to decrease by 1.9% and our target price to fall by 5 Scts. 
  • Positives from DTL II and bus reform are likely priced in. Management guided for slower M&A pipeline due to challenging economic conditions in China and Australia. 
  • Possible legislation against Uber and GrabCar is a key positive.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-16
CIMB Securities SGX Stock Analyst Report HOLD Downgrade BUY 3.17 Down 3.39