ComfortDelGro - DBS Research 2018-02-14: Watching For Fleet Stabilisation/ Reversal

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Watching For Fleet Stabilisation/ Reversal

• ComfortDelGro's 4Q17/ FY17 performance marginally below.
• Higher payout ratio with final DPS of 6.05 Scts.
• Singapore taxi fleet continues to contract; potential mitigation from Lion City Rental acquisition.
• Maintain HOLD, revised TP: S$2.12.

Maintain HOLD, for > 5% yield. 

• We maintain our HOLD recommendation with a Target Price of S$2.12. We have trimmed our forecasts by 2-3%, 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 of ~5% could provide support for its share price. We expect DPS to be at least maintained, given its lower capex requirements and net cash position. 
• A stabilisation of the contraction in its taxi fleet, or approval of its Lion City Rental acquisition with better-than-expected earnings accretion (vis-à-vis our expectations) and improvement in operations 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 a contraction in taxi fleet. However, we believe DPS will remain stable on the back of a higher payout ratio, providing yields of c.5%, thus supporting the share price.

Potential catalyst. 

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

Valuation

• Our target price is revised to S$ 2.12, on the back of 2-3% reduction in our earnings forecasts; This is based on the assumption of a smaller taxi fleet in Singapore, offset by higher contribution from public transport segment. 
• Our Target Price 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 - Watching for fleet size stabilisation/ reversal 

Maintain HOLD, > 5% yield. 

• We maintain our HOLD recommendation with a marginally lower Target Price of S$2.12, on the back of a 2-3% cut in our forecasts. While headwinds persist for its taxi business, this should be partially mitigated by improvements in its public transport business. 
• ComfortDelGro’s current yield at ~5% could provide support for its share price. We expect DPS to at least maintain even on the back of lower profits, given its lower capex requirements. 
• A stabilisation of taxi fleet contraction, or significant profit contribution from its stake in Lion City Rental could be catalysts for the stock.

4Q17 were behind our expectations. 

• 4Q17 results came in behind our expectations with net profit at S$59.5m, down c.16% y-o-y from a year ago. This was a result of lower operating profit contribution from most of its business segments, mitigated slightly by improvements in the Public Transportation Service segment (+S$1.7m). The main declines came from Taxi (-$31.8m) and Automotive Engineering Services (-$16.8m).

Final DPS of 6.05 Scts, similar to FY16. 

• FY17 net profit was at S$301.5m (-4.9% y-o-y) on the back of a revenue of S$3.97bn (-2.2%). A final DPS of 6.05 Scts was proposed, which was similar to that in FY16. 
• Including the interim DPS of 4.35 Scts paid, total DPS for FY17 will amount to 10.4 Scts, marginally higher than FY16 (10.3 Scts), despite a lower profit. This implies a higher payout ratio of 74.6%, vs 70.1%, which is within our expectations.

Group revenue in 4Q17 posted drop, mitigated by Public Transport. 

• As per the trend seen in 9M17, Group revenue dipped in 4Q17 as well. 
• Taxi segment and Auto Engineering posted revenue drop of -12% and 23% y-o-y, respectively, to S$292m and S$27m. Public Transport, however, saw a 7.6% y-o-y increase to S$643m.

Operating margins dipped to 8.4% in 4Q17. 

• 4Q17 saw higher operating costs, increasing 1.2% to S$935m, despite a 0.6% revenue drop. As a result, operating margin declined to 8.4%, from 10% a year ago. 
• Amongst the cost line items, 4Q17 saw higher staff costs (+4.2% to S$396.2m) and depreciation (+3.4% to S$101m), offset by lower contract services (-2.4%), materials and consumables (-13.8%), road taxes (-20.8%) and taxi drivers’ benefits (-14.9%) amongst others.

Taxi – fleet size contracts 21% in FY17 

• Taxi fleet size at 13,244 as of Dec 2017. The drop in profits was largely due to the continued contraction of its Singapore taxi fleet. As of Dec’17, its fleet size stood at 13,244, down c.21% from a year ago, and from around 14,800 as of Sep.
• We understand that idle rate stood at single digits. We believe management will continue to right-size its fleet in accordance to demand. While it was indicated that with the tie-up with Uber for Uber Flash, there have been signs that resignation by taxi drivers has slowed, though management’s caveat that this is just the initial trend. 
• The strategy is to maintain a low idle rate, coupled with lower rentals and incentives to retain and recruit drivers.

Taxi fleet renewal to take a back seat. 

• Given the challenges faced by its taxi segment, management will not be active in replacing its fleet. Instead, it has tried to attract taxi drivers to switch to existing taxis with better offers/ incentives (instead of acquiring brand new taxis), and scrap those near the statutory age. As a result, we understand that at the current juncture, there would be no impairment from the fleet reduction. 
• We have lowered our average fleet assumption in Singapore to 12,500 and 12,000 for FY18F and FY19F, respectively.

Acquisition of Lion City Rental still before Competition Commission. 

• The proposed 51% acquisition of Lion City Rental (LCR) is still pending approval from the Competition Commission of Singapore (CCS). 
• We have not factored this into our forecasts, though our initial estimates point to 1-4% in profit accretion, based on our assumptions of rental rates, utilisation, operating margins, etc. (click link for note on 11 Dec 2017: ComfortDelGro: Buying into private-hire vehicles through Lion City) 

DTL3 ridership ramping up though breakeven could only come in FY19F. 

• Average daily ridership of DTL was said to be around 450k/day, and seems to be ramping up nicely. Though ridership seems to be closing in on 500k/day, management alluded that breakeven could be pushed out into FY19, given the recent fare reduction. 
• Meanwhile, negotiations with LTA on the transition of North-East Line (NEL) to the New Rail Financing Framework is still underway.
• We continue to hold the view that the net financial impact on ComfortDelGro’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. 

• As seen in FY17 final DPS, despite headwinds and a drop in profits, the Board has proposed a similar final DPS, implying a higher payout ratio (74.6%). 
• Going into FY18F, we continue to expect the penciled-in payout ratio to move up towards 80% in FY18F, leading to a yield of 5.2% at the current market price. 
• Although management has taken a view to deliver inorganic growth, as seen with the recent suite of acquisitions, its balance sheet still has the capacity to gear up.

Valuation & Forecasts 

• Maintain HOLD, Target Price revised marginally to S$2.12. 
• We have further toned down our average taxi fleet assumption in Singapore to 12.5k/ 12k for FY18F/19F, from about 13.2k as of Dec 2017. As such, our forecasts have been adjusted down by 2-3%, partially offset by higher contribution from the Public Transport Services segment. 
• We project net profit to dip by 6%, before reverting up by 5% in FY19F. At current price, prospective yield stands at > 5%.

Risks to our recommendation. 

• Downside risk includes
  1. a stronger contraction in taxi fleet, and an increase in competitive landscape from Grab;
  2. non-approval of acquisition of LCR stake by CCS. 
• Upside risks includes
  1. significant acquisition;
  2. fruition of LCR the acquisition, and better-than-expected accretion vis-à-vis our expectation, with a significantly toned-down competition landscape.

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2018-02-14

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.12 Down 2.180