ComfortDelGro - CIMB Research 2017-10-24: Singapore’s Long-term Public Transport Goals Intact

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Singapore’s Long-term Public Transport Goals Intact

LTA’s latest move is not a surprise given the long-term aim of reducing reliance on private transport, as indicated by the 2013 Land Transport MasterPlan (LTMP).
We expect a stronger long-term impact on rental cars, but a neutral near-term impact on ComfortDelGro's taxi segment as stiff rental fare competition is likely to persist.
The move is positive for long-term prospects of public transport operators, and in turn ComfortDelGro's (CD) Singapore public transport segment.

ComfortDelGro is scheduled to announce its 3Q17 results on 10 Nov. We forecast 3Q17 core net profit likely fell 10% qoq and 18.1% yoy to S$71.5m.
Maintain Hold with an unchanged DCF-based TP of S$2.15/share (WACC: 7.4%).

The Land Transport Authority (LTA) on Monday announced that it will lower the vehicle growth rate to 0% p.a. from Feb 18 onwards (current: 0.25% p.a.) for certificate of entitlement (COE) categories A and B (private cars), and D (motorcycles), but maintain it for Category C (Goods Vehicles and Buses) until 1Q21.
Also, the LTA guided for the impact to be minimal on COE supplies as the quota is largely determined by the number of vehicle de-registrations.

The LTA’s move is unsurprising and in line with the long-term goal of the 2013 LTMP of reducing reliance on private vehicles and making public transport the preferred mode of transport in Singapore.
We believe this move will have a stronger long-term impact on the growth of the car rental segment, given it is has seen the most growth since 2013 versus other vehicle segments.

Whilst the move may crimp future car rental numbers, we deem it neutral for ComfortDelGro's taxi segment’s near-term prospects as we believe the aggressive fare competition by third-party ride booking apps may not ebb until access to funding halts for such players. This will cap ComfortDelGro's need to grow its taxi fleet, and in turn cap its earnings growth for the foreseeable future, in our view.

The move has positive implications for the longer-term viability of ComfortDelGro's Singapore Public Transport Services (PTS) segment under SBS Transit (SBST) as the longer-term shift to public transport will ultimately result in higher ridership. However, given ComfortDelGro lost its bid for the Thomson East Coast line to SMRT recently, near-term prospects will largely be capped at the turnaround of the rail segment once the Downtown line Phase 3 starts in Oct 17.
Management has guided for the rail segment to break even from mid-CY18.

ComfortDelGro is scheduled to announce its 3Q17 results on 10 Nov.
We forecast 3Q17/9M17 core net profit likely fell to S$71.5m/S$222.2m (vs. 3Q16/9M16 core net profit of S$87.3m/S$245.9m) largely on the back of continued weakness in the public transport and taxi segments.
We expect the unfavourable currency translation from a weaker GBP to continue to impact the public transport segment, while the dwindling taxi fleet and consistent idling rate (2Q17: 5%) could continue to hurt taxi division’s future prospects.

We forecast ComfortDelGro's 3Q17/9M17 core net profit likely fell to S$71.5m/S$222.2m.
We estimate its 3Q17 revenue likely declined to S$925.9m (-6.2% qoq/-8.8% yoy) largely as we expect:
1. the public transport segment revenues continued to decline on unfavourable GBP currency translation; and
2. the taxi segment’s revenue likely fell on dwindling taxi numbers.
We estimate ComfortDelGro's taxi fleet may have fallen to a monthly average of 15.2k in 3Q17 (vs. 2Q17/3Q16: 15.7k/16.9k), assuming it still accounted for 60.9% of the latest taxi fleet of 24.5k in Sep 17 as announced by the LTA. As such, we estimate ComfortDelGro's 3Q17 EBIT likely fell 11.3% qoq and 21.9% yoy to S$99.3m (vs. S$111.9m/S$127.7m in 2Q17/3Q16), with the weakness in the taxi segment contributing the most to the decline.
We note that our forecasts are largely in line with the management’s softer revenue guidance during 2Q17 results announcement.

As we expect the LTA’s move to have a neutral near-term impact on ComfortDelGro's segments, we maintain our forecasts and Hold rating.
While the stock trades at marginally below its historical P/E average, the lack of near-term catalysts could weigh on the stock, in our view.
Upside risks include better-than-expected earnings, a successful tie-up with Uber, earnings-accretive M&As in other segments, and higher dividends.
Downside risks include further deterioration in taxi and public transport profits.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-10-24

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