ComfortDelGro - RHB invest 2015-11-30: Optimistic On Strong Profit Growth

ComfortDelGro (CD SP) - RHB Invest 2015-11-16: 9M15 Slight Ahead But Growth Is Priced In COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro (CD SP) - Optimistic On Strong Profit Growth

  • In line with expected growth in 2016 bus/taxi/rail operations – well supported by bus GCM transition and a drop in competitive intensity for taxis – we upgrade ComfortDelGro to BUY (from Neutral) and raise DCF-based TP to SGD3.60 (from SGD2.86, 23% upside). 
  • It could see a SGD710m cash inflow of SGD710m from a bus assets sale to the LTA. 
  • As management sees limited M&A prospects, its strong net cash balance sheet could translate into higher dividends. 


 Benefiting from the government contracting model (GCM). 

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

 Strong growth in the rail business. 

  • Stage 2 of the Downtown Line (DTL2), which connects the north-western parts of Singapore to the Central Business District (CBD), commences operations in December. As the two regions have lacked direct rail connectivity till now, we expect strong ridership to boost ComfortDelGro's rail revenue. 
  • Rail margins, which have declined in line with the preparation for the starting of operations at DTL2, should recover once the latter is fully operational. ComfortDelGro expects DTL2 to breakeven by end-2016. 

 Competitive intensity in the taxi business to fade. 

  • Uber and GrabCar have nibbled into the earnings of taxi operators and drivers by offering cheaper and more efficient private car hire services. We expect this elevated level of competition to fade as the LTA brings the private car hire apps under regulatory purview. 
  • Whether the authority relaxes some of its stringent regulations on the taxi industry or if the Karhoo app helps taxi operators in competing fairly with Uber is yet to be seen. 

 Increase in dividend payout. 

  • 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 the company could pay higher dividends amidst a lack of M&A activity. 

 Upgrade to BUY. 

  • We increase our DCF-based TP to SGD3.60 (from SGD2.86). 
  • Our TP implies a 0.6x 2016 PEG. Our higher-than-consensus earnings are supported by improvements in ComfortDelGro's bus, taxi and train businesses.


Shekhar Jaiswal RHB Research | http://www.rhbinvest.com.sg/ 2015-11-30
OCBC Securities SGX Stock Analyst Report BUY Upgrade NEUTRAL 3.60 Up 2.86


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