ComfortDelGro - UOB Kay Hian 2015-11-16: 3Q15 No Surprises; Pull-back A Buying Opportunity For This Defensive Shield

ComfortDelGro - UOB Kay Hian 2015-11-16: 3Q15 No Surprises; Pull-back A Buying Opportunity For This Defensive Shield COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro Corporation (CD SP) - 3Q15: No Surprises; Pull-back A Buying Opportunity For This Defensive Shield 

  • No surprises as CD continued to deliver, with 9M15 net profit growing 6% yoy to S$233.7m. 
  • Its core operations remained resilient with steady revenue growth of 3-7%. 
  • We remain upbeat on CD’s steady business outlook, strong cash flow generation and a potential special dividend next year. 
  • Maintain BUY with a DCF-based target price of S$3.30 (unchanged) and the recent profit-taking could be an entry opportunity. 

RESULTS 


• Delivering as expected. 

  • ComfortDelGro Corporation’s (CD) 9M15 net profit rose 6% yoy to S$233.7m and accounted for 74% of our full-year estimate. 
  • Revenue growth was broad-based across key segments as core businesses continued to improve. 
  • 9M15 rail revenue growth came in at 7.3% yoy, followed by the taxi and bus segments’ revenue growth of 3.7% and 3.3% yoy respectively 

• Balancing costs pressure well, led to steady margins. 

  • Despite the upward pressure in costs, we feel CD has managed costs well, with 9M15 operating margin holding up at 11.6% (vs 11.5% for 9M14). 
  • Staff costs and depreciation costs went up 3.9% and 9.0% respectively but this was mitigated by a 9.6% yoy fall in fuel costs. 

• Strong cash flow generation. 

  • CD’s high 9M15 net capex of S$479m (+30% yoy) will be easily funded by its strong operating cash flow of S$564m. As at Sep 15, the group was in a marginal net cash position (S$3.7m). 


ESSENTIALS 


• Addressing concerns over competitive landscape in taxi. 

  • A number of questions were targeted at the impact of third-party apps such as Uber and GrabTaxi and their impact on CD. Management highlighted that its call booking volume had continued to increase. 
  • As an indication of high utilisation, management reiterated that its taxi idle rate was close to zero, with idle taxis primarily being used for replacement taxis or undergoing the process of being de-registered. 
  • In addition, its taxi driver turnover rate had not increased substantially and management is not unduly concerned. 

• No major cost uptick on opening of DTL stage 2. 

  • We expect the Downtown Line (DTL) stage 2, which comprises of 12 stations, to commence operations on 27 Dec 15. 
  • As most of the staff needed for the DTL stage 2 has been hired, the group does not expect costs to rise significantly in 4Q15, with only a slight uptick in costs for promotions and awareness campaign recorded ahead of the opening. 
  • Management also highlighted that the cost of the free rides during the opening of DTL 2 will be borne by the authorities. 

• Fuel hedging updates. 

  • As of 9M15, the group hedged 60% and 30% of its 2015 and 2016 fuel requirements respectively. 

• Special dividend in store? 

  • 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 (SBS T) at 0.9-1.0x P/B, 
    2. SBS T pays down 50% of its outstanding debt, and 
    3. the remaining net cash is fully paid out as a special dividend. 
  • Currently, we have not assumed the special dividends and our dividend yield of 2.9% - 3.1% for 2015-16F is based on a dividend payout of 54%. 


EARNINGS REVISION/RISK 

  • No change in earnings. As the group continues to deliver steady revenue growth, we forecast CD to register a net profit growth of 9% yoy in FY16. 
  • Key risks include weaker ridership or lower-than-expected average fare increase for its bus and rail divisions. Another risk is declining taxi revenue due to third-party taxi apps. 


VALUATION/RECOMMENDATION 


• Maintain BUY with a DCF-based target price of S$3.30. 

  • CD’s prospects remain steady, with a 3-year net profit CAGR of 11%. The group has a strong balance sheet and could be ready to pounce on potentially accretive M&A should opportunities arise in the next 1-2 years. 
  • We see the recent share price pull-back offering investors a potential decent entry opportunity into CD. 


SHARE PRICE CATALYST 

  • More accretive overseas acquisitions. 
  • Higher-than-expected special dividends in 2016.


Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.30 Same 3.30


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