ComfortDelgro - DBS Research 2016-08-15: Steady ride amid uncertainties

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelgro - Steady ride amid uncertainties

• Reiterate BUY, TP S$3.17.
• 2Q16 within expectations.
• Lower capex needs, stable and sustainable bus ops with new Bus Contracting model in Singapore.
• Projecting 8-10% growth despite challenges. 

Maintain BUY, TP adjusted to S$3.17. 

• We reiterate our BUY recommendation on ComfortDelgro (CD) as we expect margins to expand on the back of lower fuel prices, coupled with the transition to the Government Bus Contract model from 1 September 2016. 
• With lower capex needs, we believe there is potential for a higher dividend payout.

2Q16 results within expectations. 

• Net profit registered a credible y-o-y growth of 5.3% to S$85.2m, but revenue dipped marginally by 1.4% to S$1.02bn due to unfavourable currency FX translation. EBIT margins gained 30bps to 12% from lower fuel/ electricity costs (-21.2%), materials and consumables (-31.4%) but partially negated by higher staff costs, R&M, amongst others. 
• Despite competition, its taxi operations were resilient, posting an operating profit of S$46.6m (+5.7%). 
• 1H16 net profit grew by 6.8% y-o-y, stands at 49% of our full year forecast. 
• An interim dividend of 4.25 Scts (1H15: 4 Scts) was declared, equating to a payout ratio of 57.8%, similar to last year.

Factoring in weaker GBP; credible growth still projected. 

• We trimmed our FY16/17F earnings marginally by 2%/3%, to factor in a weaker GBP. We maintain our positive view on the counter as we expect profit growth in FY16F/17F at 8-10%, which is above its average trend. 
• While the market may be disappointed with the absence of a one-off disposal of its Singapore bus assets under the bus contracting model, we think otherwise. With lower capex needs and improved sustainability of its Singapore bus operations, we believe the group could opt for an even higher payout ratio, thus enhancing its dividend yield.

Valuation

• Our target price is adjusted to S$3.17, based on average of discounted cash flow (DCF) and price-earnings ratio (PER) methods. 
• Our TP implies 19x PE on FY17F earnings, which is +1SD above its historical average, factoring in the asset-light model for the bus operations in Singapore.

Key Risks to Our View

• Loss of bus contracts, changes in regulations on operations, and currency swings may impact our forecast.

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.17 Down 3.230