ComfortDelGro - CIMB Research 2016-02-10: A resilient transport play

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - A resilient transport play

We believe the risk of a rising idle rate for taxis has subsided. We continue to like CDG’s dominant position in the Singapore taxi market.
We expect CDG’s rail profit to improve throughout FY16-18 due to the enlarged rail network from the commencement of DTL stage II and stage III operations.
We expect the transition to the government contracting model (effective Aug 16) to unlock significant capital for CDG and improve its bus operating margins.

Upgrade CDG from Hold to Add, with a higher DCF-based target price of S$3.27.

We raise our FY16F EPS by 0.7% and FY17F by 1.3% to reflect the subsided risk of rising taxi idle rate.
We upgrade ComfortDelGro (CDG) from Hold to Add, with a higher CY16 DCF-based target price of S$3.27 (WACC: 7.5%).
CDG remains our preferred investment proxy to the Singapore Land Transport sector, due to its well-diversified businesses, strong balance sheet, as well as its overseas growth initiatives.

CDG is the dominant player in the Singapore taxi market, with a 60% market share. In our view, Singapore could be the world’s best taxi market, due to the high cost of car ownership and the government’s strict control on car population growth.
With the setting of taxi fares currently de-regulated, CDG’s dominance of the market makes it the defacto pricing leader. Management said CDG has a close to 100% taxi hire-out today.

We expect CDG’s rail earnings to expand throughout FY16-18F, driven by the improving profitability of the Downtown Line (DTL).
Due to the lack of scale, the DTL stage I (six stops, 4.3km) has been loss-making since it commenced operations in Dec 13.
We expect the DTL’s losses to narrow significantly in FY16, with the enlarged network from the DTL stage II (12 stops, 16.6km) that has started operations in Dec 15. The whole DTL should turn around by late-FY17, when stage III commences operations.

CDG is a key beneficiary of Singapore’s on-going bus reform. The tendering process for the three public bus packages has been progressing smoothly. In Dec 15, CDG announced it would transfer 50 newly-purchased buses to the government at their net book value (NBV) of S$23m, representing 6.8% of the group’s total Singapore bus NBV of S$338m.
We look to more clarity on the terms of the transfer of CDG’s remaining bus assets within 1H16. CDG should also see improved bus margins post the reform.

We continue to like CDG’s M&A-driven overseas growth initiatives. CDG has a long-term target to grow the group’s overseas profit contribution from slightly below 50% (as of 9MFY15) to over 60%.
The potential M&As should be backed by CDG’s strong balance sheet. CDG was in a slight net cash position as at end-Sep 15; the net cash position would be further strengthened by the potential bus disposals under the GCM.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-10

CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 3.27 Up 3.17