ComfortDelGro - CIMB Research 2016-12-05: Largely stable outlook

ComfortDelGro - CIMB Research 2016-12-05: Largely stable outlook COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Largely stable outlook

  • ComfortDelGro will see a full-year’s positive impact from Singapore bus reform as well as benefit from the commencement of DTL stage III operations in FY17F.
  • Overseas contribution likely to be subdued due to adverse FX translation. Taxi likely to see stagnant growth due to sustained competition from Uber and Grab.
  • Net cash position and improving cashflow to support higher dividend payout and overseas M&As. Maintain Add with CY17 DCF-based TP of S$2.86 (WACC: 7.0%).

Singapore bus: first full-year positive impact from GCM 

  • FY17 marks the year that ComfortDelGro sees the first full-year benefit from the Singapore public bus industry’s transition to the new government contracting model (GCM), which became effective in Sep 2016.
  • Under GCM, the Singapore bus operators no longer bear fare risk but receive predetermined contract fees (indexed to several cost factors like fuel, labour, etc). With reference to the 8-9% EBIT margin for UK public buses (which uses a similar GCM), we project ComfortDelGro’s Singapore public bus margin to improve to 7-8% in FY17-18F vs. 2.7% in FY15 and 4.6% in FY16F.
  • Being asset-light in nature, the Singapore GCM has also relieved operators’ capex burden, hence improving their operating cash flow.

Rail: DTL to achieve turnaround after stage III completion

  • The Downtown Line (DTL) stage III is slated to commence operations in Sep 2017.
  • Being the biggest stage of the DTL with 16 stations (6/12 for stage I/II), stage III covers the region from the CBD to the east part of Singapore. We expect the whole DTL’s daily ridership to almost double to 450k-500k after stage III becomes operational (current daily ridership is 234k) due to the larger network.
  • With the stage III coming onstream, the DTL should see full turnaround by late-FY17 and will no longer be a drag on the group’s rail profitability (ComfortDelGro’s Northeast Line has always been profitable). We forecast rail EBIT at S$12m/S$18m in FY17F/18F vs. S$7m in FY16F to reflect the positive impact of the DTL stage III.

Taxi: likely stagnant growth due to competition from Uber, Grab

  • We project stagnant taxi EBIT growth in FY17F/18F at 0%/1% in view of sustained competition from Uber and Grab; projected growth is considerably slower compared to 3-9% yoy growth that the taxi business achieved in FY11-15.
  • Having said that, we are less concerned about the sharp rise in taxi idle rates or a drop in taxi rental revenue given that 
    1. taxis still provide more stable and usually higher net income to drivers than private hire cars (i.e. Uber and Grab), and 
    2. the group continues to replace cheaper-rental Hyundai Sonata models (day rate: c.S$100) with the higher-rental (c.S$130) but more fuel-efficient I40 model. 

Overseas bus: upbeat underlying business clouded by adverse FX 

  • We understand from management that the group’s overseas bus operation has remained upbeat, with rising business volume. However, we note that the growth of the underlying business could be clouded by adverse FX translation in FY17 due to the significantly weakened £ after the Brexit referendum.

Decent dividend yields; overseas M&A is a re-rating catalyst 

  • With the above factored in, we are looking at low-to-mid single-digit EPS growth in FY17-18F. We recommend Add on ComfortDelGro for its potentially higher dividend payout in FY16-18F of 66-70% (translating into yield of 4.0-4.7%) vs. 64% in FY15, backed by its net cash position and expected increase in operating cashflow under GCM. 
  • Potential overseas M&A is a key re-rating catalyst. 
  • FX fluctuation is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.860 Same 2.860