ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-02-13: 2016 In Line, But Times Will Get Tougher; Downgrade To HOLD

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - 2016 In Line, But Times Will Get Tougher; Downgrade To HOLD

CD reported in-line 2016 results and a higher dividend payout of 70.1%.
While we remain confident of the group’s execution abilities, the operating outlook for Singapore taxis will deteriorate and this is likely to crimp CD’s growth.
We cut our 2017-18 earnings forecasts by up to 10% and downgrade to HOLD with a lower PE-based S$2.47 (previously S$2.90). Entry price: S$2.20.

ComfortDelGro Corporation’s (CD) 2016 results were in line with our and market expectations. Its 2016 net profit grew 5% yoy to S$317.1m, driven by tight cost management and lower fuel and electricity costs which resulted in a 0.4ppt increase in operating margin to 11.4%.
The slight positive was an increase in its dividend payout to 70.1% (from 64.1% in 2015) with a final DPS of 6.05 S cents (total 2016 DPS of 10.30 S cents/share).

CD’s 2016 costs declined 1.7% yoy, supported largely by lower fuel and electricity costs (-23.2% yoy) as well as a decline in materials and consumables costs (-27.0% yoy), which helped offset the higher staff costs (+3.9% yoy) and repairs and maintenance costs (+3.7% yoy).
The taxi segment fared relatively well, with operating profit up 2.2% while the public transport services segment (bus and rail) saw flat operating profit (+0.3% yoy).

While CD’s taxi operations are performing relatively well in Singapore with a utilisation of 98.6% seen in 2016, we believe operating conditions will deteriorate further as supply of private hire cars are increasing, leading to pressure on taxi rentals.
Peers such as SMRT are already offering flexible hours rental schemes for taxis at lower rates. CD has implemented revenue sharing schemes since Nov 16 and we think this could eventually result in an overall reduction in average taxi rental.

Contributions from CD’s Singapore bus segment should improve in 2017 as 2016 only reflected four months of effect from the new bus contracting model.
The rail division continued to see higher ridership and the Downtown Line (DTL) should benefit from the upcoming opening of the DTL3 in 2H17. However, costs for the rail division would remain elevated, primarily due to a higher headcount.
Also, 2017 will see the full impact of a 4.2% fare reduction with effect from 30 Dec 16.

As part of CD’s leadership succession plan, Group CEO Mr Kua Hong Pak will be stepping down on 30 Apr 17, after 14 years in position. He will be succeeded by Mr Yang Ban Seng, who has been the CEO of CD’s taxi division for 14 years.
Nevertheless, we understand Mr Kua will continue to assume the position of Senior Advisor to counsel the group and mentor the newly-appointed CEO.

We reduce our 2017-18 net profit forecasts by 7-10% respectively to reflect a more challenging environment for taxis in Singapore. Looking ahead, we have reduced our assumptions on fleet growth (0% vs 1.5% previously in 2017), taxi rental (-2.5%) as well as a lower utilisation rate (to 97% vs 99% previously) to reflect the concerns discussed above.
Key risks include:
1. Worse-than-expected impact on taxi revenue due to third-party taxi apps and difficulty in attracting taxi drivers,
2. weaker-than-expected economic outlook in the UK and a weaker currency, and
3. rising fuel costs.

While we like management’s execution capability and track record, we think the operating environment will continue to deteriorate, particularly for the taxi segment with the advent of third-party car hires which has brought about structural changes.
In addition, we believe the uncertainties in the UK over the Brexit could impact CD’s operations in the UK as well.
Hence, we downgrade CD to HOLD from BUY with a lower PE-based target price of S$2.47 (previously S$2.90). This is based on its mean PE of 16.5x rather than our previous assumption of a 10% premium to mean.
While the taxi segment is undergoing a structural change, CD’s move to adopt an asset-light model for its rail and bus operations would lead to lower capex. This could suggest further increases in dividend payout to mitigate the lack of growth due to a more challenging taxi outlook.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-13

UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 2.47 Down 2.900