ComfortDelGro Corporation - RHB Invest 2016-08-16: Remains The Most Resilient Growth Story

ComfortDelGro Corporation - RHB Invest 2016-08-16: Remains The Most Resilient Growth Story COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation - Remains The Most Resilient Growth Story

  • 1H16 results were slightly below expectations due to unfavourable currency translation effects from overseas bus operations and lower-than-estimated overseas taxi revenue. 
  • We lower our earnings estimates by 2-3% to account for the above, and reduce our DCF-based TP to SGD3.18 (from SGD3.25, 10% upside). 
  • Maintain BUY as CD’s welldiversified businesses have the potential for margin expansion on GCM implementation. 
  • Its net cash balance and lower future capex needs should also fund M&A opportunities, and we think higher dividends are likely.

Government Contracting Model (GCM) should boost bus margins.

  • ComfortDelGro’s (CD) contract fee of SGD5.3bn under the GCM for the Singapore bus business includes revenue compensation, payment in lieu of depreciation of bus assets (implying sale of buses at book value) and margins.
  • While the GCM should improve EBIT margin for bus operations, exact profitability will only be known when CD announces its 4Q16 results. We maintain that CD should be able to earn 7-8% EBIT margins for its Singapore bus business under GCM.

Taxi business remains resilient. 

  • Despite on-going concerns over competitive pressures from Uber and Grab, CD’s taxi business continues to register steady revenue and operating profit growth. 
  • Management indicated that the hire-out rate for Singapore taxi business remains close to 100%. While it continues to face difficulties in adding new drivers to domestic taxi operations, management said it will be able to maintain the elevated hire-out rates without material increases in taxi drivers’ benefits.

Utilisation rates moving up in Chengdu, China. 

  • Increased competition from private car hire apps and changes in fleet to compressed natural gas (CNG)- fuelled cars have led to higher idle rates for its fleet in Chengdu. 
  • Nevertheless, management indicated that most issues have been resolved and that utilisation rates have started to move up again.

Cautious about international businesses. 

  • During the recent quarter, volatility in forex rates has led to weaker contributions from its UK and Australian operations. 
  • Management highlighted that these risks will continue to persist in the near term and weigh on growth prospects for its international business.

Higher dividend payout in the absence of M&As. 

  • CD had a net cash position of SGD323m as at end 2Q16 (7% of market cap). 
  • We maintain that its strong balance sheet should enable CD to undertake earnings accretive acquisitions in the overseas market. However, given management’s cautious stance on the macroeconomic outlook, we think any M&A opportunities in the near term would be less likely. 
  • With reduced capex requirements following implementation of GCM and a lack of M&A activity, we believe CD could gradually increase its dividend pay-outs. 
  • We have factored in gradual increases in pay-out from 65% to 80% by 2019, implying 3-5% dividend yields for FY16F-18F. 
  • Key downside risks to our call include lower-than-estimated margins under the GCM and further delays in the breakeven of the Downtown Line’s operations.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-16
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.18 Down 3.250