ComfortDelGro Corporation - RHB Invest 2016-11-14: No Signs Of Fundamental Weakness In Business

ComfortDelGro Corporation - RHB Invest 2016-11-14: No Signs Of Fundamental Weakness In Business COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation - No Signs Of Fundamental Weakness In Business

  • Maintain BUY, with a SGD3.19 TP (30% upside) as ComfortDelGro’s well- diversified business provides growth avenues in a weak economic environment. 
  • Its local bus business should benefit from higher margins post-transition to GCM, while its resilient local taxi business should continue growing despite rising competition. Its recent share price weakness seems overdone. 
  • Furthermore, its net cash balance and lower future capex needs should enable M&As, while supporting higher dividends. 
  • Despite the unfavourable forex effect for its overseas units, earnings grew 2.5% YoY in 3Q16.

Bus margins and rail revenues to improve. 

  • We expect ComfortDelGro’s Singapore bus business to book 7-8% EBIT margins from 4Q16 under the government contracting model (GCM), which should support growth into 2017. 
  • Its rail unit should see revenues increase amidst higher ridership once the Downtown Line Stage 3 (DTL3) is operational in Sep 2017, despite the recently- announced 4.2% fare reduction.

Singapore taxi business still resilient. 

  • Its Singapore taxi business has seen negligible impact from rising competition presented by Uber and Grab. Its taxi hire-out rate remains close to 100% and revenue grew 6-7% in 3Q16. 
  • While we expect the growth of its fleet to decelerate, its taxi rental rates (and taxi revenues) should rise as it continues to replace older cars with newer taxis.

M&As in the works. 

  • Without providing details about the expected size and timeline of a deal, management indicated that it is actively working on M&A opportunities in areas and countries where it already has a presence in.

Growth despite unfavourable forex. 

  • 3Q16 EBIT dipped 1.4% YoY to SGD127.2m amidst unfavourable forex translations (otherwise, EBIT would have grown 2.4% YoY). 
  • Despite the unfavourable currency effect, it managed to lift profit by 2.5% YoY to SGD87.3m.

Giving credit where it is due. 

  • We view ComfortDelGro as a well-diversified company with an excellent management team that has the ability to generate strong cash flow, deliver steady profit growth, and offer gradual dividend growth. This is on top of potential earnings-accretive M&As – given its net cash balance sheet – despite an uncertain economic environment. 
  • We reiterate our BUY call with an unchanged DCF-based SGD3.19 TP

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-14
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.190 Same 3.190