ComfortDelGro - CIMB Research 2017-01-12: Stable outlook for 2017

ComfortDelGro - CIMB Research 2017-01-12: Stable outlook for 2017 COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Stable outlook for 2017

  • Better Singapore bus margin and operating cash flow under the GCM.
  • Improving Singapore rail profit on the commencement of DTL stage III operations.
  • M&A activities to drive net profit growth of overseas bus businesses.
  • Competition pressure from Uber and Grab in the taxi business likely manageable.
  • Strong balance sheet; decent FY16-18F dividend yield of 3.9-4.7%.

Well-diversified land transport play; overall stable outlook in 2017 

  • Given the group’s well-diversified business profile, we expect an overall stable outlook for ComfortDelGro in 2017, underpinned by 
    1. anticipated better Singapore bus margin under the government contracting model (GCM), 
    2. improving rail profit from Downtown Line (DTL) stage III operations, and 
    3. the acquisition of an additional stake in ComfortDelGro Cabcharge (CDC)
  • We expect ComfortDelGro’s taxi idling rate to stay benign in 2017 due to the group active fleet management.

Singapore bus: first full-year benefits from bus reform 

  • 2017 will be the first full year of the GCM (effective Sep 16). Key benefits of the GCM vs. the old model include its 
    1. cost-indexed feature, and 
    2. asset-light nature. 
  • Referring to similar bus contracting models in other countries, we project a higher EBIT margin of 7% for Singapore bus under the GCM vs. a 1.6-3% margin under the old model; this leads to a 54% yoy gain in group Singapore bus EBIT to S$54m in FY17F (FY16F: S$35m).

Singapore rail: improving profitability on DTL stage III operations 

  • Since the commencement of preparation works in 2012, the DTL has always been lossmaking, dragging down the group’s overall rail EBIT from S$21m-28m in FY09-11 to S$3m-8m in FY13-15. 
  • With stage III due for completion in Sep 17, we expect the DTL to finally achieve a turnaround in 2H17 and group FY17F rail EBIT to reach S$12m, a 100% yoy gain over FY16F’s S$6m. 
  • We forecast group rail EBIT to grow by another 58% to S$19m in FY18F due to the full-year contribution from DTL stage III.

Overseas bus: bottomline growth supported by M&A activity 

  • Due to the adverse translation from the weakened £, we expect the group’s overseas bus revenue and EBIT (in S$ value) to contract further in FY17F, by 4.5% and 3.1% yoy, respectively. 
  • Despite the anticipated lower revenue and EBIT, we are optimistic that the group’s overseas bus business will see low-single-digit net profit growth in FY17F due to the expected positive financial impact from the acquisition of the additional 49% stake in CDC (we expect the acquisition to be concluded in 1Q17).

Taxi: competition pressure from Uber, Grab likely manageable 

  • We expect ComfortDelGro to maintain a low taxi idling rate in FY17F given the group’s active fleet management. ComfortDelGro should be able to keep its taxi revenue and operating profit in FY17F at the FY16F level as we expect the weakness from a possible declining taxi fleet and positive rental growth from taxi renewal to largely offset each other. 
  • We do not expect ComfortDelGro, being the Singapore taxi market leader, to follow its weaker peer Trans-Cab’s move to cut taxi rental.

Maintain Add, with unchanged DCF-based target price of S$2.91 

  • We like ComfortDelGro for its diversified business profile, strong balance sheet (S$259m net cash as at end-3Q16) and proven overseas M&A growth strategy. 
  • We forecast decent FY16-18F yield of 3.9-4.7%, based on incremental payout ratio of 66-70% (FY15: 64%). 
  • More overseas M&As are a key re-rating catalyst; stiffer competition is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-01-12
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.910 Same 2.910