ComfortDelGro Corporation - RHB Invest 2016-06-27: Impact From Brexit And More

ComfortDelGro Corporation - RHB Invest 2016-06-27: Impact From Brexit And More COMFORTDELGRO CORPORATION LTD C52.SI 

ComfortDelGro Corporation - Impact From Brexit And More

  • We lower CD’s FY16-17 profit by 4.0-4.8% to account for lower earnings from its UK taxi business, a translation loss for its UK businesses from a weaker GBP vs the SGD, and a likely increase in taxi operating licence fee in Singapore. 
  • Maintain BUY with a lower DCF-based SGD3.25 TP (from SGD3.40, 22% upside), as we continue to like CD for its ability to generate strong operating cash flow, deliver steady growth, and offer a gradual rise in dividends, coupled with potential EPS-accretive M&A, given its strong net cash balance sheet despite an uncertain economic environment.

UK accounts for 21% of earnings. 

  • Businesses in the UK account for 25% of ComfortDelGro’s (CD) revenue and 21% of its operating profit, of which 90% of revenue and 97% of operating profit are derived from operation of bus services, with the rest from operation of taxi services. 
  • CD is guiding for an increase in UK revenue amidst expectations of strong growth of its bus business. 
  • We expect earnings from its UK bus business to be more resilient vs earnings from its UK taxi business.

Expect some weakness in UK taxi business. 

  • The International Monetary Fund (IMF), in its latest annual report on the British economy, said that the UK’s exit from the European Union (Brexit) could lead the country into a recession. 
  • While we do not expect the UK to enter a recession, we do expect some weakness in its economy over the next few years, which may translate into lower profits for CD’s UK taxi business.

Factoring in translation loss from UK following Brexit. 

  • The GBP weakened 6.8% against the SGD amidst the confirmation of Brexit. A weaker GBP would translate into lower profit contribution from CD’s UK operations. 
  • We lower our FY16-17 GBP/SGD exchange rate estimate by 10-13%, translating into 2-3% lower earnings. As CD does not remit UK earnings to Singapore, there is negligible impact on its cash flow from the weakening of the GBP.

Potential increase in Singapore’s taxi operating licence fee. 

  • A Straits Times article stated that the Land Transport Authority plans to increase taxi operator’s operating licence fee from 0.1% of gross taxi revenue to 0.2% this year, and to 0.3% next year. CD currently pays c.SGD0.5m in operating licence fee. The proposed increase in fee could lower CD’s 2016 PBT by c.SGD0.5m or 0.1%. 
  • We are factoring in the likely increase in operating fee in our estimates.

No impact on dividends. 

  • CD’s Singapore business generates sufficient cash flow to sustain its dividend payments. 
  • In addition, cash inflows from the sale of its Singapore bus assets to the Government should allow CD to gradually increase dividend payments over the forecast period.

We maintain our BUY call. 

  • We maintain our BUY call premised on CD’s more visible earnings growth amidst an uncertain economic environment, diversified earnings base, and strong net cash balance sheet that enables it to undertake earnings-accretive M&A. 
  • Key risks to our forecasts include:
    1. Lower-than-estimated margins for its Singapore bus business; 
    2. Lower-than-estimated growth in Singapore taxi profits.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-06-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.25 Down 3.40