ComfortDelgro - DBS Research 2017-05-15: Lower Growth Trajectory

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelgro - Lower Growth Trajectory

While we like the resilience and geographical diversification of the Group, we are projecting that the growth trajectory could be taken a notch lower from its average rate of c.6% seen in the past 5 years.
We had advocated a BUY on the counter earlier this year, after the Group’s full year results showed resiliency despite operational challenges. With share price up by almost 10% YTD, coupled with our lower TP/ forecasts leaving minimal upside from current levels, we downgrade to HOLD.
We would prefer to accumulate at lower levels.

ComfortDelGro’s 1Q17 headline net profit registered a strong 12.4% y-o-y growth to S$82.5m, on the back of 2.4% y-o-y dip in revenue to S$972m. The jump in the headline net profit was due to a surge in net income from investments of S$13.7m, which increased by S$10.5m. This arose mainly from special dividends from Cabcharge Australia Limited. Excluding this, results would have been below our expectations.
Group revenue dipped 2.4% (S$23.6m) y-o-y arising from unfavourable FX impact of S$24.8m, negating a marginal increase of S$1.2m. The drop in revenue came from all segments, except Public Transport Services Business (+0.8% to S$561.5m) and Driving Centre Business (+3% to S$10.3m). Taxi Business registered a drop of 5.7% to S$314.6m, while Automotive Engineering Services Business decreased by 13.4% y-o-y to S$73.7m.

The Group’s total operating costs dipped by 1.7% to S$871.5m, helped mainly by foreign currency translation of S$23.1m (weaker GBP), without which actual costs would have increased by S$8.4m instead.
EBIT margins dipped by 0.7% points to 10.3%, from 11% the same period last year. As a result, EBIT registered a decline of 8.1% y-o-y to S$100.5m.
The fall in EBIT arose from all operating segments except Bus Station Business, with the largest decline from Automotive Engineering (-20.6% to S$10m) and Taxi Business (-12.2% to S$33.8m).
Automotive Engineering was impacted by lower volume of diesel sold while Taxi Business came about from lower fleet, rental and higher unhired rate locally and overseas.

The Group’s Taxi Business registered a drop in revenue and PBIT of 5.7% (-S$19.1m) and 12.2% (-S$4.7m) y-o-y, respectively. We understand that this came about from both Singapore and overseas operations, while unfavourable FX translation contributed to S$5m in drop in revenue.
The taxi unhired rate in Singapore, we understand, crept up to slightly above 3% (but under 3.5%) coupled with a lower fleet of about 16,300 taxis (based on LTA’s Feb data) from c.16,900 a year ago.

In Singapore, the total taxi industry fleet has contracted by c.5% since Dec 2015 arising from competition from private car hire companies. Given its dominant position in Singapore and relative strength, its market share has inched up marginally to above 60%, but the overall impact still affected the Group’s performance.
Management provided an update that about 3,000 drivers are on the flexible rental scheme such as the Current Job 25 (CJ25). This was up from around 2,000 from a quarter ago. In this scheme, the fixed daily rental rate is lowered. In return, the driver would have to accept at least 25 call bookings per week and the fares trips will be kept by the company, with a cap of S$352/ week.

We trimmed our FY17F/18F earnings by 3% and 5%, respectively, arising from a weaker operating profit base. The adjustment came about largely from our revised assumption on the total taxi fleet in Singapore (which has dropped more significantly based on data from the LTA till Feb to c.16,300, from 16,800 in Dec 2016).
We also trimmed our assumption for its Automotive Engineering services on expectations of lower volume of diesel sold with a lower taxi fleet.

Largely as a result of our revised forecasts, we trimmed our PE/DCF based TP to S$2.78, from S$2.94 previously. Our TP is based on the average of PE and DCF (WACC 9.3%, t=1%).
We lowered our PE multiple peg to 15x FY17F/18F (from 17x), equivalent to -0.5 standard deviation below its historical average to reflect its lower profit growth profile. With the recent performance of the share price, this gives limited upside and hence, we trim our recommendation to HOLD, from BUY.
Notwithstanding its challenging environment, we do like its business/ geographical diversification and relatively steady profile, but would await better entry points.

Upside risks to our view:
1. Group’s ability to leverage on its balance sheet and deliver acquisitions to further supplement its growth;
2. Further regulatory changes in favour of taxi companies or reduced competition by private car hire

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-15

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 2.78 Down 2.940