ComfortDelGro (CD SP) - RHB Invest 2015-12-02: 2016 Should Be a Year Of Strong Growth

ComfortDelGro (CD SP) - RHB Invest 2015-12-02: 2016 Should Be a Year Of Strong Growth COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro (CD SP) - 2016 Should Be a Year Of Strong Growth

  • With benefits of positive core bus operations’ margins, capital freed up by the bus GCM implementation, rail business’ strong growth from the start of DTL2 and reduced competition from private car hire apps, we expect ComfortDelGro to register a 33% EPS growth in 2016. 
  • Our DCF- based TP of SGD3.60 implies 0.6x 2016F PEG and, with limited potential for M&As, the company could potentially pay out higher dividends. 

 Bus business to benefit from the government contracting model (GCM). 

  • We expect ComfortDelGro (CD) to earn 7-8% operating margins on its core bus business, once the operations transition to the bus GCM begins. 
  • In addition, the company could see cash inflows of SGD710m from the sale of its bus assets to the Land Transport Authority (LTA) at a 10% discount to book value in 2016. 

 Rail business to benefit from Downtown Line Stage 2 (DTL2). 

  • DTL2, which connects the north-western parts of Singapore to the Central Business District (CBD), is to commence operations in December. 
  • As the two regions have lacked direct rail connectivity till now, we expect strong ridership to boost CD’s rail revenue. 
  • Rail operating margins, which have declined in line with the preparation for the start of operations at DTL2, should recover once the latter is fully operational. 
  • Management expects DTL2 to break even by end-2016. 

 Private car hire apps to be regulated. 

  • Uber and GrabCar could be brought under regulatory purview once the Government completes its current review of private car hire apps. This could lead to lower competition in the taxi industry, as either the private car hire apps would be burdened with regulatory compliance costs or the LTA could relax some of its stringent taxi regulations, so taxi operators compete fairly. 

 May increase dividends. 

  • At the 3Q15 results briefing, management said the weak macroeconomic environment would limit the prospect of M&As in 2016. Given its strong net cash balance sheet, we believe CD could pay higher dividends amidst a lack of M&A activity. 

 Top sector pick. 

  • CD remains our top land transport sector exposure for 2016 given our strong earnings growth expectations, which are well supported by its bus, taxi and rail businesses. 
  • Our DCF-based SGD3.60 TP implies a 0.6x 2016F PEG.

Shekhar Jaiswal RHB Research | http://www.rhbinvest.com.sg/ 2015-12-02
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