ComfortDelgro - DBS Research 2016-10-31: Share price weakness on fare cuts an over-reaction

ComfortDelgro - DBS Vickers 2016-10-31: Share price weakness on fare cuts an over-reaction COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelgro - Share price weakness on fare cuts an over-reaction

  • Announced fare cuts of 4.2% in Singapore could be reason for recent share price weakness.
  • Implications limited to its rail operations, as fare revenue risk for buses has been transferred to Land transport Authority.
  • Rail accounts for c.6% and 1% of revenue and operating profit, respectively.
  • Market may have over-reacted on news; retain BUY recommendation.

What's New 

Fare reduction of 4.2%, effective 30 Dec 2016, possibly the reason for ComfortDelGro’s recent price weakness. 

  • The Public Transport Council (PTC) announced last week that public transport fares will be reduced by 4.2% from 30 Dec 2016, with the conclusion of its 2016 Fare Review Exercise. A further 1.5% reduction will be carried over to the next Fare Review. The reduction follows on from last year’s 1.9% cut. This could have led to weakness on ComfortDelGro’s (CD) share price given its exposure in the Singapore public transport space.
  • In addition, the PTC has also simplified the fare structure by lowering the fares for fully-underground lines to the same level as above-ground rail lines.

Impact on revenue on SBS Transit, CD’s subsidiary, is S$8.9m. 

  • The estimated impact on revenue from the announced fare reduction on the Public Transport Operators will be about S$79m a year. 
  • The split of the impact on Bus (LTA), SBS Transit (Rail) and SMRT Rail will be about S$35.6m, S$8.9m and S$34.6m, respectively.

Our view 

Fare reduction higher than envisaged, but impact to CD is minimal. 

  • In our view, the 4.2% cut is wider than our assumption of 1% reduction each for 2017 and 2018. However, the additional reduction is fairly muted on SBS Transit (and indirectly to CD).

Rail operations account for about 6% and less than 1% of profits. 

  • With the transition of the bus operations into the Government Bus Contracting Model (GCM) since 1 Sep 2016, the fare revenue risk for buses has been transferred to the Land Transport Authority (LTA). Hence, the impact on CD is only limited to its rail operations. 
  • The impact is relatively muted on CD as rail accounts for only about 6% and less than 1% of its revenue and operating profits.

Retaining our positive view on CD, notwithstanding GBP weakness. 

  • While there have been concerns arising from GBP weakness, the impact on CD is only on translation. Its UK operations accounts for an estimated 17% of net profit (based on FY15). With a 10% decline in GBP against SGD, our net profit estimate will reduce by 1.7% after translation. We have currently assumed an FX rate of GBP/SGD1.75, about 3% higher than the current spot rate.
  • We reiterate our positive view on the counter, and like its defensive aspects, coupled with its potential for a higher dividend payout in view of lower capex requirements with the transition to the GCM.

3Q16 results due on Friday, 11 November. 

  • CD is due to report its 3Q16 results on 11 November 2016, after the market closes. 
  • Despite concerns on its operations, we are expecting the group to deliver net profit growth of c.6-8% y-o-y in 3Q16, tracking our estimates. We are retaining our forecast for now.

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-31
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.170 Same 3.170