ComfortDelGro Corporation - RHB Invest 2016-05-13: Steady Growth In An Uncertain Economic Environment

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COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro Corporation - Steady Growth In An Uncertain Economic Environment

• In view of lower automotive engineering revenue and higher benefits offered to taxi drivers, we lower forecast EPS by 10-11% and reduce our DCF-derived TP to SGD3.40 (from SGD3.60, 23% upside). 
• Maintain BUY as CD’s profit growth remains supported by a:
  1. Transition of its Singapore bus business to higher-margin GCM in 4Q;
  2. Steady rise in taxi profits amidst a faster fleet replacement;
  3. Strong growth in rail business.
• We expect an accelerated rise in dividends if the firm fails to make an earnings-accretive M&A.

Bus government contracting model (GCM) implementation on track.

• Management said that the GCM for its bus business is to be implemented in 4Q irrespective of whether the third bus tender is opened up for bidding. 
• We estimate ComfortDelGro Corp’s (CD) Singapore bus business to earn a 7-8% EBIT margin starting 4Q.

Slower taxi fleet growth; rental rates may still rise. 

• Taxi hire-out rate in Singapore remains at 100%. However, the queue of drivers willing to take up new taxis has dried up, forcing CD to look at lower fleet growth. 
• Despite slower fleet growth, we expect rental rates to rise as it plans to aggressively replace its older cars with newer Hyundai i40s, which attract higher purchase costs.

Delay in Downtown Line’s (DTL) breakeven still within expectation. 

• Amidst lower-than-estimated ridership, management is now guiding for a delay in DTL achieving a breakeven compared to its earlier estimate of 3Q16. 
• We see limited impact on our estimates as we have forecasted a breakeven to be achieved only by end-4Q16.

Maintain BUY. 

• We lower FY16F/17F EPS by 11% and 10% respectively, to account for a greater number of shares, smaller taxi fleet growth locally, increased taxi drivers benefit expense, and lower automotive engineering revenue. 
• We continue to like CD for its ability to generate strong operating cash flow, deliver steady profit growth, and offer a gradual rise in dividends, coupled with potential earnings-accretive M&As, given its strong net cash balance sheet despite an uncertain economic environment. 
• The key risk to our call would be lower-than-estimated margins for its Singapore bus business under the GCM.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-13

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.40 Down 3.60