ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2018-05-14: 1Q18 Broadly Within Expectations; Transitioning To A More Rational Market

COMFORTDELGRO CORPORATION LTD SGX: C52

ComfortDelGro Corporation (CD SP) - 1q18 Broadly Within Expectations; Transitioning To A More Rational Market

ComfortDelGro’s 1Q18 performance was broadly in line, accounting for 23% of our full-year estimate. The taxi segment appeared to be stabilising with the exit of UBER in Singapore and recent M&As could provide further earnings momentum from 2QFY18.
Maintain BUY with a higher PE-based target price of S$2.43 (previously S$2.25) as we raise FY19-20 net profit estimates by 2-5% to reflect a more rational taxi market in Singapore.

ComfortDelGro Corporation’s (CD) 1Q18 results were broadly in line, accounting for 23% of our full-year estimate. 1Q18 net profit declined 20% y-o-y but this was distorted by special dividends of S$10m in 1Q17 from Cabcharge Australia. Excluding this, the decline in net profit was a lower 8.6% y-o-y.
In addition, ComfortDelGro’s effective tax rate was 18.5% in 1QFY18 compared with 16.6% in 1QFY17 owing to lower non-taxable income in 1QFY18.

Public transport services delivered higher revenue and operating profits, mostly due to the bus segment. This segment also benefited from higher UK revenue after the acquisition of a bus & coach company in Wales.
Taxi continued to see further declines but enjoyed a 0.7 ppt rise in operating margins to 16.6% in 1QFY18 due to a lower idle rate of only 2-3% in Singapore.
Another major segment, the automotive engineering, suffered a 14% y-o-y decline in revenue due to a smaller taxi fleet in Singapore and thus, lower volume of fuel sales to its taxi fleet.

Management appears to be more upbeat on the outlook for Singapore taxi and cited anecdotal evidence that suggests a transition to a more rational outlook (lower driver incentives and commuter discounts). In fact, ComfortDelGro has recently seen net additions to its number of taxi drivers as some drivers left private car hire and reverted to being taxi drivers.
The average age of its taxi fleet in Singapore is 3.3 years, with a manageable idle rate of 2-3% as at end- Mar 18. Daily taxi rental is at S$105 and there appears to be signs of stabilisation, although ComfortDelGro continues to offer other incentives such as accident free and long-service incentives.
The group continues to explore participation in the private car hire space but the situation is still fluid after the exit of UBER from Singapore and the expected entry of several new players including Go-Jek, RydeX and Jugnoo.

Public transport services, particularly the Singapore bus segment, is expected to benefit from the new Seletar Bus Package in 2Q18 and the Bukit Merah Bus Package in 4Q18. The Australia and UK bus segments would also benefit from recent M&As.
As for the train division, Singapore would benefit from full-year contributions from the Downtown Line 3 (DTL3), notwithstanding a decline in fares from Dec 17.

Over the past few months, ComfortDelGro has been very active on the M&A front. Since Feb 18, the group had announced over 7 M&As totalling S$123m in several segments, including the bus and taxi divisions.
All these M&As are expected to be completed by 2QFY18. The pace of M&As has certainly picked up in a short period of time and compares with S$166m in the preceding five years.

We maintain our 2018 earnings but raise 2019-20 forecasts by 2-5% as we factor in a more rational market after the acquisition of UBER’s Southeast Asia operations by Grab.
Our latest estimates for 2019-20 each assume a 2% y-o-y decline in taxi fleet size compared to 5% y-o-y each previously.

Our target price is based on a long-term average PE of 16.6x (on FY19F earnings). Despite the disruption in the Singapore taxi sector from private hire cars (which appears to be stabilising), we believe ComfortDelGro should still trade at mean valuations given the transition in bus and trains in Singapore to an asset-light business model.
For the bus segment, the change to the bus contracting model (BCM) has also improved the economics, in our view.

A more rational competition and no predatory pricing by newcomers in the private car hire segment.
Rising dividend payout.
More accretive and aggressive overseas acquisitions.

Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-14

SGX Stock Analyst Report BUY Maintain BUY 2.43 Up 2.250