ComfortDelGro - CIMB Research 2015-12-09: Let’s go downtown

ComfortDelGro - CIMB Research 2015-12-09: Let’s go downtown COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro - Let’s go downtown 

  • We believe that CDG’s earnings growth in FY16-17 will be driven by fresh contribution from the Downtown Line (DTL) stages II and III. 
  • We expect the implementation of the Government Contracting Model (GCM) for buses in Aug 2016 to unlock significant capital and improve operating margins. 
  • The rise of Uber and GrabCar presents possible threats to CDG’s taxi business. 
  • CDG plans to continue expanding its overseas business, although management guides for a slower M&A pipeline in 2016. 
  • Maintain Hold rating with target price of S$3.17, based on FY16 DCF. 

■ Rail: reduced losses and eventual turnaround of DTL 

  • Due to its lack of scale, DTL stage I (six stations, 4.3km) has been loss-making and a drag on CDG’s overall rail profit since it commenced operations in Dec 2013. 
  • We expect DTL’s losses to narrow significantly in FY16, with an enlarged network and scale from the commencement of stage II operations (12 stations, 16.6km) by Dec 2015. 
  • The DTL is likely to turn around in 2017, when stage III commences operations. 

■ Singapore bus: smooth transition to the GCM 

  • We believe that FY16 will be an eventful year for the group’s Singapore bus business, with the anticipated launch of the GCM by the Land Transport Authority (LTA) in Aug 2016. The tendering process for the three public bus packages is progressing smoothly. 
  • We expect the sale of bus assets to occur in early-2016, after transfer of BSEP buses by end-2015. 
  • In our view, the new model will unlock significant CDG capital that was previously attached to buses and result in commercially-viable bus operating margins. 

■ Taxi: outlook threatened by Uber and GrabCar 

  • We think that CDG’s established dominance in the Singapore taxi market (60% market share, price leader) will be undermined by the rise of Uber and GrabCar, which allows drivers to opt to rent cars cheaply to take ride-bookings and provide private commuting services. 
  • While management insists that its taxi fleet has been fully hired out, we foresee increasing difficulties for CDG to maintain its current 100% hire-out rate. 

■ Overseas M&A opportunities but likely slower activity in FY16 

  • We continue to like CDG’s overseas expansion initiatives, supported by the group’s good overseas operating track record and its strong balance sheet (CDG’s net cash position will be strengthened by the sale of bus assets). 
  • While the long-term outlook remains promising, management guided for a slower M&A pipeline in FY16, as the tougher economic conditions in China and Australia discourages potential sellers from making decisions fast. 

■ Maintain Hold, with target price of S$3.17 

  • We keep our Hold rating on CDG, with a target price of S$3.17 based on FY16 DCF. 
  • We expect decent EPS growth of 13% and 7% in FY16 and FY17, respectively, driven by DTL expansion and improving bus operating profit but the threat from Uber and GrabCar to the group’s taxi business is an overhang. 
  • CDG’s current FY16 P/E of 19.1x is 1.5 s.d. above its historical 1-year forward P/E.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.17 Same 3.17