ComfortDelGro - UOB Kay Hian 2016-05-13: 1Q16 No Surprises; Continues To Deliver

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - 1Q16 No Surprises; Continues To Deliver

CD’s 1Q16 results were in line with net profit of S$73m growing 8.6% yoy.
Key segments enjoyed top-line growth while costs were contained, especially fuel and electricity costs.
We favour CD for its resilient outlook, strong cash flow generation and steady dividends.

ComfortDelGro’s (CD) results were in line with our expectation. 1Q16 net profit grew 9% yoy to S$73.4m, underpinned by a slight 0.3ppt rise in operating margin to 11%.
Revenues in key segments continued to improve. 1Q16 rail revenue growth came in at 27.5% yoy, followed by the taxi and bus segments’ revenue growth of 3.7% and 3% yoy respectively.

Despite the slight upward pressure in operating expenses (+3% yoy), management contained costs well, with 1Q16 operating margin holding up at 11.0% (10.7% in 1Q15).
Staff costs rose 7.9% yoy (on an increase in headcount to support growth in services and DTL2) and contract services increased 6.1% yoy (higher volume of cashless transactions for Singapore taxis), but this was mitigated by lower fuel and electricity costs (-24.8% yoy).

The Downtown Line (DTL) 2 has been operating since 27 December and the last stage - DTL3 is slated for completion in 2H17.
Management highlighted that ridership is below expectation and DTL is still loss-making but we think that ridership should progressively improve after the DTL3 opens. In the case of the North East Line (NEL), the line opened in Jun 03 and took about three years to break even.

As of 1Q16, CD has net cash of S$400.9m (S$0.19/share) compared with S$229.2m in Dec 15 (S$0.11/share). 12 Given its strong financials, we see a case for potential M&A opportunities in Australia or the UK. However, we note that challenges may arise from a large-scale deal (in the UK) and differences in price expectations (in Australia). Barring any event of M&As, we see potential upside for dividends, as management plans to raise dividends in a “gradual and sensible” manner.

For 2016, we understand that capex is expected to be under S$400m but this is relatively fluid and is dependent on the final terms of the bus financing framework. More details are expected from Sept 16 onwards.

To date, the group hedged about 25% of its 2016 fuel requirements for SBS Transit and for diesel resale about 35% has been hedged.

Earnings maintained; steady 3-year EPS CAGR of 10%. We make no change to our earnings estimate. The group continues to deliver and we forecast CD to register a healthy 3-year net profit CAGR of 10% over 2016-18F.
Key risks include weaker ridership or a lower-than-expected average fare increase in its bus and rail divisions.
Other risks would come from third-party taxi apps having a negative impact on taxi revenue and difficulties in attracting younger taxi drivers.

Against an uncertain macro outlook, we find CD resilient earnings and strong cash flows as attractive defensive shields.
Pending the final terms of the bus financing framework, we foresee a potential for a special dividend of 5.6-6.2 S cents/share. This assumes that SBS disposes its bus assets in Singapore at book value and pays out 50% of its net cash after the repayment of debt.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-13

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