COMFORTDELGRO CORPORATION LTD
C52.SI
ComfortDelGro Corporation - All Set For a Strong 2016
- FY15’s SGD302m net profit (in line with our/consensus estimates) grew 6.5% YoY aided by taxi and bus businesses and lower finance costs related to the return of BSEP buses to the Government.
- Maintain BUY and DCF-based SGD3.60 TP (29% upside), as we expect lower energy costs, the transition of local bus business to the GCM, a ramp up in rail and decline in competitive intensity in the domestic taxi market to translate into 30% earnings growth in FY16.
- The stock is trading at 15x FY16F P/E.
Bus operations to turn profitable post transition to the Government Contracting Model (GCM).
- Management is guiding for a decline in Singapore bus revenue in 2016, aided by 1.9% lower fares and transfer of some bus routes to new operators as ComfortDelGro failed to win the first two bus tenders.
- However, we would like to highlight that core bus operations in Singapore should turn profitable, post transition to the GCM in September.
- The company’s bus operations could earn 7-8% margins under the GCM.
Taxi business to grow, no impact from Uber/Grab.
- ComfortDelGro’s FY15 taxi hire out rate stood at a healthy 99.2%. Although its local taxi fleet grew by less than the permissible 2% in FY15, we believe it could take advantage of low Certificate of Entitlement (COE) prices and grow the fleet by 2% in FY16. This would translate into higher taxi rental revenue.
- It also believes the elevated competition from Uber/Grab is not sustainable, as these firms have significantly reduced driver incentives.
- We maintain that the Government could create a level playing field between taxi companies and private car hire apps in 2016.
Rail business to see strong growth.
- The business reported a 4Q15 operating loss amidst cost build-ups related to the opening of Downtown Line 2 (DTL2). However, average daily ridership at Downtown Line 1 (DTL1) rose 23.5% YoY and we expect it to grow rapidly this year on improved connectivity offered by DTL2. This ought to lead to higher revenues and these operations should move towards breakeven by end-FY16.
- Management expects the segment to turn profitable once Downtown Line 3 (DTL3) begins operations by mid -2017.
Steady growth in dividends more likely.
- ComfortDelGro could see cash inflows for the sale of its bus assets to the Government in FY16, which could be used to pay special dividends in case it fails to identify earnings-accretive M&A opportunities. However, management prefers to gradually increase dividends instead of offering special dividends and prefers to conserve cash for M&As.
- Reiterate BUY, for ComfortDelGro’s more visible earnings growth amidst an uncertain economic environment, diversified earnings base, strong net cash balance sheet and management’s strong execution track record of delivering steady earnings growth.
- Our DCF-based SGD3.60 TP (WACC: 8%, TG: 1%) implies 19.6x FY16F P/E.
- Key risks to our forecasts include unfavourable forex leading to higher translation losses for its overseas business, slow growth in rail ridership and lower-than-estimated margins for its local bus business.
Shekhar Jaiswal
RHB Invest
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http://www.rhbinvest.com.sg/
2016-02-15
RHB Invest
SGX Stock
Analyst Report
3.60
Same
3.60
