ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-11-13: 9M17 Broadly In Line. Coping Well Amid Revenue Pressure

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - 9M17 Broadly In Line. Coping Well Amid Revenue Pressure

ComfortDelGro’s 3Q17 results were in line with our expectations, with 9M17 net profit of S$242m which fell 2% yoy. 9M17 operating profit fell 10% yoy but lower minorities, taxes and higher investment income helped limit the decline.
We trim 2018-19 earnings forecasts by up to 4% to build in more conservative taxi and rail assumptions.
Maintain BUY with a lower PE-based target of S$2.25 (previously S$2.34).

ComfortDelGro Corporation’s (CD) 9M17 net profit fell 1.6% yoy to S$242m, broadly in line with our estimate. Though 9M17 accounted for circa 82% of our estimate, 4Q tends to be seasonally weaker and we see more pressure ahead, particularly for its Singapore taxi segment.
Though 9M17 operating profits fell 10% yoy, overall group net profit was supported by lower taxes, lower minorities (after buying out ComfortDelGro Corp Australia), higher investment income and lower contract services.
Other than public transport services and driving centres, all other major segments saw declining 9M17 operating profits – taxi (-17% yoy), automotive engineering (-28% yoy) and vehicle inspection (-4% yoy). Financials remain strong, with CD in a net cash position of S$188m.

Taxi idle rate continued to creep up in 3Q17 at 5.4% compared to 5.0% in 2Q17. Management guided that its fleet in 3Q17 averaged 15,800 units, but this is likely to trend down on the higher idle rates and the scrapping of older Hyundai cars.
Nevertheless, management has taken steps to help stem the decline, including the roll-out of an option for fixed fares and lower rentals but with revenue share for its drivers. While 9M17 taxi bookings were down 20% yoy, management shared that 3Q17 bookings were actually up qoq, though no exact numbers were provided.

This segment saw 9M17 operating profit grow 0.2% yoy and could see further increases as the Downtown Line (DTL) 3 opened in October. The group hopes that DTL will breakeven in early-19 when average ridership hits 500,000/day. The breakeven for DTL3 has been delayed as fares will be reduced 2.2% from 29 Dec 17.
As for its UK bus operations, Metroline is performing well, with two new routes, but Scottish Citilink is seeing intensifying price competition.
Its operations in Australia are performing well and management sees more M&A opportunities but these would be relatively small M&As.

Assuming the worst case scenario where we strip out the entire cashflow contribution from taxi segment (estimated to be S$0.05-0.08/share), we estimate 2017-19F FCF to remain at around S$0.16-17/share.
At this level, we note CD will still be able to sustain the current 2017-19F DPS of S$0.10/share (4.7-4.9% yield) as the expected cashflow savings from the taxi segment is expected to be substantial as historically, the capex for taxis and motor vehicles tend to be cS$300m p.a.

The alliance may include collaboration in management of fleet vehicles, booking software solutions in Singapore and also taxis being made available on Uber's app.
Management hopes to conclude discussions by the end of the year.

We raise our 2017 earnings forecast slightly by 3% as we refine our cost assumptions, specifically lower contract services to account for lower volume of cashless transactions as well as lower TransitLink expenses following the bus contracting model (BCM) transition.
Meanwhile, we lower our 2018-19 earnings forecasts by up to 4% to build in a more conservative taxi and rail assumptions.
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 based on a long-term average PE of 16.6x. At the current price, we believe CD’s shares have mostly reflected the disruption from private hire cars.
We see limited downside risk to current share price as taxi earnings will unlikely be zero in the next 2-3 years and the long-term outlook for public infrastructure (bus and MRT) in Singapore will still be very resilient.
We see potential upside to rail earnings, given the government’s plans to double rail network by 2030, with the next upcoming line being the Jurong Region Line (expected completion: 2025).

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-13

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.25 Down 2.340