ComfortDelGro Corporation - UOB Kay Hian 2016-08-15: 1H16 Within Expectations; Still Holding Up Well Despite Challenging Landscape

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - 1H16: Within Expectations; Still Holding Up Well Despite Challenging Landscape

• CD’s 1H16 results were in line, with 1H16 net profit of S$158.6m growing 6.8% yoy as costs were well contained. 
• We remain positive due to its defensive qualities but note an increasingly challenging medium-term outlook. In our view, there is potential upside risk to dividends, which could compensate for weaker growth ahead.
• Maintain BUY with a DCF-based target price of S$3.22 (previously S$3.16).

RESULTS

Commendable 1H16, higher DPS. 

• ComfortDelGro Corporation’s (CD) results were in line with our and market expectations. 1H16 net profit of S$158.6m grew 6.8% yoy, underpinned by a slight 0.3ppt rise in operating margin to 11.5%. 
• A 1H16 interim dividend of 4.25 S cents/share was declared (4.00 S cents in 1H15) with an implied dividend payout of 57.8% (unchanged).

Containing costs well, helped by lower fuel costs. 

• Despite the upward pressure in costs, management contained costs well, with 1H16 operating margins at 11.5% (11.2% in 1HFY15). 
• Costs were primarily helped by a 23% yoy decline in fuel costs, which helped offset higher repairs/maintenance costs (+9.4% yoy) and staff costs (+6.8% yoy). 
• Within the key segments, only the taxi division registered a yoy increase of 5.7% in EBIT whereas other segments such as bus and rail suffered declines owing to lower fares and currency impact in the overseas segment.

ESSENTIALS

All eyes on new bus contracting framework. 

• While there was disappointment in there being no mention of a special dividend from the new bus contracting framework as CD will lease the bus assets rather than sell it to the Land Transport Authority (LTA), the new framework will pave the way for stronger free cash flows as well as a gradual rise in dividend payout in our view. 
• We are cognisant that longer term competition will intensify when the contract period expires (averaging 7 years), but we remain confident on management’s ability to compete internationally given its strong track record.

Taxi remains resilient for now. 

• During the briefing, management highlighted that taxi hire rates remained at 99% despite the intense competition from third-party taxi applications. Also, taxi bookings grew 2.5% yoy, which suggests that CD remains resilient. 
• Management re-iterated that a key challenge is attracting new drivers, but highlighted that the profile of its drivers are slightly different as CD tends to attract full-time drivers whereas the likes of UBER tend to attract a different segment of part-time drivers. 
• In the longer term, we believe competition will intensify and CD is likely to review its taxi rental strategy to attract younger drivers by including more flexible rentals, revenue share and etc.

Good momentum in rail ridership. 

• Ridership on the NEL and DTL is picking up momentum. 
• Average daily ridership on the NEL increased 6% yoy to 558,000 passenger trips whereas DTL’s ridership is at 212,000. 
• DTL should continue to see good momentum as the third section (DTL3) is targeted for completion 2H17.

EARNINGS REVISION/RISK

2017-18 earnings forecasts adjusted upwards to reflect new bus framework. 

• We have revised our earnings forecasts upwards by up to 8% for 2017-18, to reflect the new bus contracting model. We assume savings in bus capex of about S$100m p.a. 
• In terms of EBIT margin projection for the Singapore bus operations, we referenced the UK bus operating margin (which historically garnered 8-9% EBIT margin), and modeled a conservative assumption of 5-6% EBIT margin for bus operations for 2017-18. Even so, this is still an uplift compared with the historical 2-3% EBIT margin for the bus segment under the current framework.

Key risks include a weaker economic outlook in the UK and rising fuel costs. 

• Another risk is the negative impact on taxi revenue due to third-party taxi apps as well as a difficulty in attracting younger taxi drivers.

VALUATION/RECOMMENDATION

Maintain BUY with a DCF-based target price of S$3.22 (previously S$3.16). 

• The change in target price reflects the increase in FY17-18F earnings from the shift to the new bus contracting model, as well as a lower risk free rate of 2.5% (previously 3.0%), offset by a slowdown in taxi fleet and booking growth rate. 
• While the operating landscape will be more competitive for taxis and buses (after 7 years in Singapore), CD remains relatively attractive as a potentially higher dividend payout could help mitigate pain from slower growth. 
• In addition, if SMRT is privatised, CD would also enjoy a scarcity premium in the FSSTI.

SHARE PRICE CATALYST

• More accretive overseas acquisitions.
• Rising dividend payout.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-15

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.22 Up 3.160