ComfortDelgro - DBS Research 2017-11-13: Awaiting Outcome Of Uber Strategic Alliance

ComfortDelgro - DBS Vickers 2017-11-13: Awaiting Outcome Of Uber Strategic Alliance COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelgro - Awaiting Outcome Of Uber Strategic Alliance

  • ComfortDelgro's 3Q17 results within expectations.
  • Weak taxi operations mitigated partially by public transport contribution and lower minority interests. 
  • Discussion on Uber alliance still ongoing.
  • Expect DPS to remain, HOLD, Target Price: S$2.18.



Maintain HOLD, challenges persist but > 5% yield decent. 

  • We maintain our HOLD recommendation with a TP of S$2.18. We trimmed our forecasts by 3-4% on the back of lower average taxi fleet assumption. 
  • While headwinds persist for its taxi business, this should be partially mitigated by improvements in its public transport business.  Furthermore, ComfortDelGro’s current yield at ~5% could provide support for its share price. 
  • We expect DPS to be at least maintained, if not nudged up, given its lower capex requirements. A stabilisation of taxi fleet contraction, or positive fruition of its strategic alliance with Uber and perceived benefits could be catalysts for the stock.


Where we differ: High DPS despite lower profits. 

  • We are at the lower end of consensus in terms of our earnings forecasts on the back of contraction in taxi fleet. However, we believe DPS will tick up marginally on the back of higher payout ratio, providing yields of c.5%, thus supporting the share price.


Potential catalyst. 

  • A favourable outcome of strategic alliance with Uber may help turn the tide. Regulatory changes could aid in the operations for taxis. Inorganic growth acquisitions could also mitigate weakness in taxis. 
  • Conversely, pick-up in competitive pressure could further lead to taxi fleet contraction.


Valuation

  • Our target price is revised to S$2.18, on the back of 3-4% reduction in our earnings forecasts. Our TP is based on average of discounted cash flow (DCF) and price-earnings ratio (PE) valuation methods.


Key Risks to Our View

  • Loss of bus contracts, continued slump in taxi fleet, changes in regulations on operations, heightened competition, and currency swings may impact our forecast.


WHAT’S NEW - Challenges persists but yields decent 


Maintain HOLD, challenges persist but > 5% yield decent. 

  • We maintain our HOLD recommendation with a TP of S$2.18. While headwinds persist for its taxi business, this should be partially mitigated by improvements in its public transport business. Furthermore, CD’s current yield at ~5% could provide support for its share price. 
  • We expect DPS to be at least maintained, if not nudged up, given its lower capex requirements. A stabilisation of taxi fleet contraction, or positive fruition of its strategic alliance with Uber and perceived benefits could be catalysts for the stock.

3Q17 within expectations. 

  • Despite 3Q17 net profit contracting by 8.2% y-o-y to S$80.1m, this was within our expectations. Revenue declined by 2.4% y-o-y to S$991m, largely due to contraction in taxi operations and auto engineering. This was the same trend seen since 1Q17.

Revenue drop partially mitigated by Public Transport. 

  • Similar to the trend in 2Q17, the group’s revenue dipped to S$991m (-2.4% y-o-y), due to contraction in its Taxi business (-11% to S$298m) and Auto Engineering business (-19% to S$42m), among others. This was partially mitigated by Public Transport Services which increased by 4.6% to S$601m, coupled with favourable FX translation (+S$6.1m).

EBIT margins dipped on higher opex. 

  • Group operating costs dipped by 0.9% to S$879.9m, smaller vis-à-vis top line, thus resulting in EBIT margins contracting to 11.2% (3Q16: 12.5%). 
  • Among the cost line items, 3Q17 saw higher staff costs (+3.3% to S$370.4m) and depreciation (+4.6% to S$102.8m), offset by lower contract services (-7.7%), materials and consumables (-8.8%), road taxes (-15.6%) and taxi drivers’ benefits (-20.1%), among others. As a result, operating profits declined to S$111.5m, by 12.3% y-o-y.

Taxi – fleet size contracts, outcome of potential Uber alliance awaited 

  • Taxi fleet continues contracting, -12% YTD. The drop in taxi fleet was largely expected, and based on LTA’s statistics, CD’s total fleet stood at around 14,800 (as of September). We understand that the idle rate stood at around 5.4% in 3Q17.
  • Going into 4Q17, we understand that management could further lower its fleet size, and reduce its idle rate further. It will be taking delivery of some hybrid Toyota Prius (which was ordered earlier in the year) and looking to scrap older Hyundai Sonata models.

Uber strategic alliance still pending; could provide positive catalyst for share price... 

  • Management indicated that discussions with Uber on its potential strategic alliance (first announced earlier in August) is still underway; and are hoping for a conclusion soon. As per our earlier note on 23 August 2017 (see report: ComfortDelgro: First take on Comfort’s tie-up talks with Uber), we believe the alliance could pertain to having Comfort/CityCab on Uber’s booking platform while CD could provide engineering and fleet management services for Uber’s Lion City Rentals. The structure and potential is uncertain at this juncture, though a positive conclusion could catalyse the counter.

…but competition till aggressive. 

  • On the other hand, we are cognisant that stiff competition still persists, particularly with Grab which has recently raised US$2.5bn in funding. We also note that post the announcement by CD on discussion for strategic alliance, Grab swiftly fired the first salvo with attractive rental rebates for taxi drivers.

DTL3 ridership ramping up though cognisant of upcoming fare reduction that could push breakeven further. 

  • With the opening of Downtown Line 3 (DTL3), average ridership was understood to be around 430,000/day, and ramping up. Management remains guarded on indicating a breakeven level given the upcoming fare reduction to be implemented on 29 December 2017. 
  • In addition, while operations at NorthEast Line (NEL) are performing well, we understand that negotiations on the transition to New Rail Financing Framework is currently underway. That said, we believe net financial impact on CD’s rail operations should be at least neutral, given that this segment has seen subdued profitability since 2013 with the operating costs of DTL.

Yield of > 5%, assuming higher payout on reduced capex.

  • Despite headwinds and our projected drop in profits into FY17F/18F, we believe CD could still maintain its yield given lower capex requirements. 
  • We continue to expect payout ratio to move up progressively towards 80%. We have pencilled in payout ratio to increase to 74%/79% in FY17F/18F, leading to a yield of 5.3% at current market price.


Valuation & Forecasts 


Reduced forecasts to reflect smaller taxi fleet. 

  • Given the contraction in taxi fleet in Singapore, we have revised down our average taxi fleet assumptions down to 15,400/14,000/13,800 for FY17F/18F/19F. This leads to a 3- 4% reduction in our forecasts. As such, we are projecting net profit to dip by 3%/6% in FY17F/18F, before reverting back up by 5% in FY19F. 
  • Despite the contraction in earnings, we believe management could increase its payout ratio given its lower capex requirements. Based on our forecasts, CD has a prospective yield of > 5%.




Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-11-13
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.18 Down 2.330



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