ComfortDelGro - CIMB Research 2016-11-12: Upbeat underlying businesses; M&A to drive growth

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Upbeat underlying businesses; M&A to drive growth

9M16 core net profit slightly below expectations, at 74% of full-year forecast (4Q is seasonally weaker); the miss was mainly due to start-up cost for DTL stage III.
3Q16 impacted by adverse FX translation for overseas operations (weaker £, CNY)
Underlying businesses remain upbeat. Singapore taxi hire-out rate stands at 99%.
Management in active negotiations for overseas M&As; strong balance sheet.

Upgrade from Hold to Add, with slightly lower target price to S$2.86 after rolling over our valuation to CY17 DCF (WACC: 7.0%).

9M16 core net profit came in slightly below our expectations, at 74% of our full-year forecast (4Q seasonally weaker; 9M in FY12-15: 77-78%).
The miss was mainly from start-up cost related to the Downtown Line (DTL) stage III, which continued to drag the group’s overall rail profitability during the quarter.
Management expects the whole DTL to turn profitable after DTL stage III commences operations in Sep 17.

3Q16 was also impacted by adverse FX translation (weakened £, CNY) for overseas operations. As a result, 3Q16 revenue dipped 3.1% yoy to S$1.02bn (3Q15: S$1.05bn) while operating profit fell 1.4% yoy to S$127.2m (3Q15: S$129m).
On the same currency basis, revenue and operating rose 1.5% and 2.4% yoy respectively. Despite the adverse FX translation, group net profit rose 2.5% yoy to S$87.3m in 3Q16 (3Q15: S$85.2m) due to less leakage to minority interest.

Management saw that the group’s underlying businesses remained upbeat in 3Q16. In UK, bus operation continued to see increasing business volume.
In Singapore, the taxi hire-out rate stood at a healthy 99% in 3Q16, and management has been monitoring the market closely (on a weekly basis) to manage its fleet size.
Management said the Singapore bus operating margin (not disclosed) under the government contracting model (launched in Sep 16) has met the group’s previous projection.

We expect stable revenue and better margins for Singapore bus in 2017, under the new bus model. Rail profitability should improve in 2H17, due to the network effect from DTL III operation (expected Sep 17).
Despite continued competition from Uber & Grab, we expect Singapore taxi revenue and profit to remain stable or to see slight growth, as the group benefits from higher rental by replacing old Sonata taxis (rental: c.S$100/day) with new i40 model (c.S$130).
UK bus revenue should be lower, only due to the weaker £.

We like the group’s overseas M&A growth strategy, especially given that the weakened global currencies vs. S$ has made the prospective acquisition(s) cheaper than it would have been.
We believe the potential acquisition(s) could be in UK or Australia, where the group already has a significant presence. The acquisition would be backed by the group’s strong balance sheet (S$259m net cash as at end-3Q16).

We cut FY16F EPS by 4.8% to reflect the 3Q result miss, and FY17-18F by 2.4% due to the recently announced 4.2% fare cut (effective Dec 16) and yoy weaker £.
We think the negatives from fare cut and £ have been fully priced in, hence upgrade CDG to Add for profit stability and decent yield.
M&A is a key re-rating catalyst; FX fluctuation is a risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-12

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