ComfortDelGro Corporation - RHB Invest 2018-02-14: Awaiting Re-Rating Catalysts

ComfortDelGro Corporation - RHB Invest 2018-02-14: Awaiting Re-Rating Catalysts COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation - Awaiting Re-Rating Catalysts

  • ComfortDelGro’s 4Q17 EBIT was a tad below our estimates, as lower margins at the rail and taxi businesses led to a 24% q-o-q decline in EBIT. ComfortDelGro is guiding (and we concur) that its public transport businesses in Singapore and Australia would drive revenue growth in the near term. However, weakness in its taxi business is likely to persist, and is expected to depress earnings. 
  • While we have adjusted our 2018F-2019F earnings higher to account for earnings contribution from recently-announced acquisitions, we maintain our NEUTRAL rating with higher SGD2.05 Target Price (from SGD2.00, 2% upside), as we await more clarity on ComfortDelGro’s proposed acquisition of a 51% stake in Lion City Rentals (LCR), which is still pending regulatory approval.

Public transport services to sustain revenue growth. 

  • ComfortDelGro Corp (CD) expects higher revenue from public transport services in Singapore, as contribution from the Seletar bus package will progressively kick in from March.
  • Moreover, the increase in daily ridership for Downtown Line (DTL) should moderate losses at its rail business. While the current daily DTL ridership of 450,000 is close to the estimated breakeven of 510,000, lower average fares in 2018 would mean DTL may only breakeven in 2019. ComfortDelGro expects revenue from its Australian bus businesses to increase as well. 
  • While revenue from the UK bus business is likely to improve in constant currency terms, it believes unfavourable forex would result in y-o-y decline in revenue for its UK business.

Taxi business remains under pressure. 

  • The taxi business witnessed a SGD31.8m decline in EBIT in 2017. The business also reported single-digit EBIT margin of 8.7% in 4Q17, for the first time since 2Q08 (9.0%). ComfortDelGro’s taxi fleet size in Singapore fell 21% (-3,577) in 2017, as its market share declined to 57% from 61% as at end 2016. 
  • While ComfortDelGro would continue to replace end-of-life taxis, it has no definitive plans to add new taxis to its fleet in Singapore. With its focus on maintaining its taxi fleet size and fleet utilisation levels, ComfortDelGro is offering SGD8-12 reduction in daily rental for its Hyundai i40 taxis. It expects revenue from the taxi business to decline in 2018.

Collaboration with Uber. 

  • ComfortDelGro highlighted that it is too early to assess the impact of UberFlash on its taxi hire out rate. However, the trend seems positive, as bookings made through UberFlash seems to partially offset the decline in bookings via ComfortDelGro’s taxi booking app. It is also offering a SGD5 rental rebate to its drivers who sign up for UberFlash’s booking service. 
  • Thanks to UberFlash, ComfortDelGro’s taxi drivers are also getting more bookings during peak hours.

Maintain NEUTRAL. 

  • While ComfortDelGro’s bus and rail businesses would continue to drive revenue growth, we expect weakness at its taxi business to weigh down on earnings growth in the near term. We increase our 2018F-2019F earnings estimates by 1.6-2.3%, to account for contribution from recently-announced acquisitions. 
  • ComfortDelGro guided that on a proforma basis, all acquisitions made to-date since early 2017 (excluding LCR), would contribute slightly less than SGD10 to net profit. 
  • Given the lack of re-rating catalysts, we maintain our NEUTRAL rating with a higher DCF-derived Target Price of SGD2.05.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-14
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.05 Up 2.000