ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-08-14: 1H17 In-line, As Weakness Of Taxi Segment Was Offset By Lower Minority Interest And Taxes

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - 1H17 In-line, As Weakness Of Taxi Segment Was Offset By Lower Minority Interest And Taxes

ComfortDelGro (CD)’s 1H17 results were within our expectations, with a net profit of S$162m which grew 2% yoy.
1H17 operating profit fell 9% yoy but this was buffered by lower minority interest, taxes and higher investment income. While the taxi segment remains challenging, bus and Singapore rail segments could offer some respite in 2H17.

Maintain 2017-19 earnings forecasts and HOLD with a PE-based target of S$2.37. Entry price: S$2.20.

The group’s 1H17 net profit of S$162m was within our expectations.
Operating profits for 1H17 actually fell 9% yoy but this was mitigated by lower minorities (-22% yoy after buying out 49% of ComfortDelGro Corporation Australia), higher investment income ( > 100% to $15.9; dividend distribution from Cabcharge Australia) and lower taxes.
In terms of operating profit, most segments saw declines, led by taxis (-15% yoy), public transport services (-1% yoy) and automotives (-18% yoy).
An interim dividend of 4.35 S cents/share (+2.4% yoy) was announced, implying a 58% payout.

Taxi idle rate continues to creep up as we understand the latest idle rate is at 5% (2Q17) compared to slightly below 3.5% in 1Q17. Management also guided that taxi bookings were down 20% yoy.
Nevertheless, management has taken steps to help stem the decline, including the rollout of an option for fixed fares and a possible tie-up with Amazon for taxis to deliver parcels and goods.
Following the tough operating environment and high COE, we forecast fleet growth to decline 5% in 2017 as management’s focus would be to maintain high utilisation.

This segment saw operating profit fall 1% yoy in 1H17 but could see some recovery in 2H17 as the Downtown Line (DTL) 3 is slated for opening in October and CD hopes that DTL will breakeven in 2H18.
As for buses, the group lost a route in UK in 1H but overseas contributions from the bus segment would be helped by two new routes in Australia in 2H17.
Another event to watch out for is the award of the Thomson-East Coast Line, which could be as soon as Sep 17.

Going forward, we see the potential for higher dividends in the absence of major investments as capex intensity is expected to be lower than historical levels. We assume capex of S$300m per year over 2017-19 compared to historical levels of S$400-500m p.a..
We see upside for dividends as we have only assumed a dividend payout of 70% in 2017-19.

We maintain our earnings estimates and forecast a 5% yoy decline in 2017 before a 2% yoy recovery in 2018. However, we note that earnings visibility is limited as operating conditions for the Singapore taxi segment remains intense and the opening of DTL3 in October could help improve ridership. However, there could also be a fare review in 4Q17.
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 UK economy and a weaker currency, and
3. rising fuel costs.

Our target price is unchanged at S$2.37, which is based on a long-term average PE of 16.6x.
While management’s execution capability and track record is good, we think the operating environment will remain challenging and fluid, particularly for the taxi segment, due to disruption from third-party car hires.
However, CD’s move to an asset-light rail and bus model would lead to lower capex. This suggests a further potential for a rise in dividend payout to mitigate the lack of growth from the tougher taxi outlook.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-14

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.370 Same 2.370