ComfortDelGro - UOB Kay Hian 2016-06-21: Share Price Underperformance Not Warranted

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - Share Price Underperformance Not Warranted

We analysed the potential implication of the Brexit on its UK operations.
Given that much of CD’s earnings stem from the more resilient bus segment, we believe downside impact is limited, notwithstanding potential translation losses.
BUY CD for its resilient outlook, strong cash flow and dividends.
We have a DCF-based target price of S$3.16 and the recent underperformance is a buying opportunity.

The Brexit could have significant impact on the UK’s economy, including weaker a pound, poorer GDP outlook as well as current account deficit, which at first glance, does not bode too well for ComfortDelGro Corporation (CD), given c.25% of group revenue stems from its UK exposure.
However, a deeper analysis suggests c.88-90% of its UK revenue is derived from its bus operation, which we believe is more resilient to the current business cycle.
Our view is supported by the latest annual 2015 bus statistics (year ending March) released by the UK Department of Transport, which revealed a trend of increasing bus use in London, from 1,802m passenger journeys in 2005 to 2,364m in 2015.
We further note that despite the UK recession in 2008 and 2009, local bus journeys in London remained well supported and continued its upward growth trajectory from c. 2,160- 2,238m passenger journeys over the period. Hence, we see limited downside impact from a potential Brexit on CD’s earnings.
Meanwhile, should a Brexit scenario unfold, we reckon forex impact would be mostly translational, with limited cashflow impact, as there is a natural hedge for CD’s UK business.

While we understand that taxi hire-out rate was maintained at close to 100%, the waiting list for taxi rental has declined.
Nevertheless, we note since the enforcement of the Taxi Availability Standard in 2013, CD has been prudent in its taxi fleet expansion, with yoy taxi fleet growth in 2014 and 2015 at about 1.5% and 0.8% respectively, below the 2% allocation.
In addition, we opined that CD and Uber caters to different driver profiles. While CD attracts full-time drivers seeking job stability, Uber typically draw drivers who prefer flexibility in working hours or younger drivers looking for part-time pursuits. This would be an issue to watch out for as CD may have difficulty attracting younger taxi drivers.
As an indication, fewer people are applying for vocational license. According to Land Transport Authority (LTA), the number of applicants for taxi- driver vocational license fell from 9,094 in 2013 to 7,968 last year.

LTA has put the third bus package in Seletar up for tender, which will close on 6 Oct 16.
The Seletar bus package comprises 24 existing services and two upcoming new services, which will be operated from Ang Mo Kio, Yio Chu Kang, Yishun Bus Interchanges and will be supported by the new Seletar bus depot. The winner of the tender will operate the route for five years, with a possible two-year extension based on a good performance.
We have factored in the price discovery mechanism of the tender process and as such, conservatively assumed that incumbent operators SMRT as well as CD are unlikely to win the contract.
As the implementation of the bus package will only begin from the 1H18, we believe SMRT (11 of the existing lines) and SBS Transit (13 of the existing lines) will continue operations till the aforementioned timeline.
Meanwhile, we believe the GCM is on track, with the nine remaining incumbent bus packages to see a transition in Sep 16, providing upside in terms of bus margin as the transition will lead to lower capex and removal of fare revenue risk.

We are of the view that while autonomous cars may present positive opportunities for CD (eg potential savings in terms of fuel and manpower costs), headwinds such as infrastructure and regulatory barriers pose challenges for commercial adoption.
Likewise, until infrastructure such as charging stations become more widely available and cost of electric vehicles are on par with conventional counterparts, diesel-run vehicles will likely remain the best commercial choice for CD.
Nevertheless, we note CD has a strong track record of undertaking initiatives which are both innovative and environmentally friendly.
As an indication, the group’s UK bus business, Metroline, currently operates c.64 hybrid vehicles.
Additionally, recall that CD was the first taxi company in Singapore to roll out Euro 6 vehicles, which are compliant with the latest light vehicle/commercial vehicle emission standards.

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 10.4% over 2016-18.
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, as well as stronger-than-expected impact from the potential Brexit on CD’s UK business.

Maintain BUY and DCF-based target price of S$3.16.
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.
We see the recent underperformance of its share price as a buying opportunity.

We see potential catalysts from:
1. more accretive overseas acquisitions,
2. favourable terms for the bus financing framework, and
3. continued rise in dividend payouts from 2016 onwards.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-21

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.16 Same 3.16