ComfortDelGro Corporation - RHB Invest 2017-11-13: Biting The Bullet; Downgrade To NEUTRAL

ComfortDelGro Corporation - RHB Invest 2017-11-13: Biting The Bullet; Downgrade To NEUTRAL COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation - Biting The Bullet; Downgrade To NEUTRAL

  • ComfortDelGro’s 3Q17 revenue and EBIT were in line with our estimates, as profit from public transport services continued to grow. Sequential decline in Singapore taxi fleet and hire-out rate is expected to continue into 4Q17. 
  • While ComfortDelGro’s bus and rail businesses would drive growth, we now expect that in the near term, weakness in its taxi business would outweigh the growth registered by the public transport business. 
  • We lower taxi fleet size and hire-out rate estimates, leading to 8-13% lower earnings for 2018F-2019F. 
  • We downgrade ComfortDelGro to NEUTRAL (from Buy) with lower DCF- derived SGD2.00 TP (vs SGD2.60, 0% upside).

Higher revenue from public transport services to support growth. 

  • With full year contribution of revenue under the Government Contracting Model, we maintain that revenue and operating profit from ComfortDelGro’s (CD) Singapore bus business would continue to grow. 
  • ComfortDelGro expects revenue from its Australian and the UK bus businesses to move higher as well. While revenue from its Singapore rail business would also improve, amidst commencement of service at Downtown Line 3 (DTL3) in Oct 2017, ComfortDelGro believes that DTL may break even in 2019 (vs our estimate of breakeven in 2018), due to lower average public transport fares in 2018.

Weakness in taxi business would likely continue. 

  • The idle rate for the Singapore taxi business has continued to rise. 3Q17 taxi idle rate stood at 5.4%, compared to 5% in 2Q17 and 3.5% in 1Q17. Taxi fleet size has declined as well. ComfortDelGro believes that fleet size would continue to decline, amidst rising competition from private car hire services. 
  • ComfortDelGro refuted claims of losing 2,000- 3,000 drivers to Grab as highlighted in the media and instead believes that it may have lost less than 100 drivers to Grab. ComfortDelGro is still working with Uber on finer details of their collaboration and expects to make a formal announcement as early as next month.

Cash may get used for acquiring taxis and potential M&A. 

  • While overall capex has been on a decline, ComfortDelGro is guiding for higher near-term capex, in line with delivery of hybrid taxis from Toyota, which were ordered at the beginning of the year. 
  • While ComfortDelGro has not undertaken any major M&A yet, it continues to look for large acquisitions and collaborations similar to the one it recently entered into with Uber in Singapore. 
  • With lack of clarity on increased dividend payout by ComfortDelGro, we lower our payout estimate for 2018-2019 to 72.5% (from 75%). Based on our revised payout estimate, ComfortDelGro offers 5% dividend yield for 2018F-2019F.

Downgrade to NEUTRAL. 

  • We continue to expect ComfortDelGro’s bus and rail businesses to drive growth. However, in the near term, weakness in its taxi business would likely outweigh the growth registered by its bus business. 
  • We lower 2018F- 2019F earnings by 8-13% and reduce our long-term growth rate assumption under WACC to 0.5% (from 1%). 
  • Downgrade ComfortDelGro to NEUTRAL (from Buy) with a lower DCF-based TP of SGD2.00. 
  • Our new TP implies 14.5x 2018F P/E, which is close to its historical average forward P/E of 15.2x.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-13
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 2.00 Down 2.600