ComfortDelGro Corporation - RHB Invest 2018-05-14: Bus To Drive Growth Till Taxi Business Improves

ComfortDelGro Corporation - RHB Invest 2018-05-14: Bus To Drive Growth Till Taxi Business Improves COMFORTDELGRO CORPORATION LTD SGX: C52

ComfortDelGro Corporation - Bus To Drive Growth Till Taxi Business Improves

  • We await the final outcome of ComfortDelGro’s (CD) deal with Uber, on the likely acquisition of Lion City Rental’s (LCR) private hire car fleet and the Group’s definitive strategy to expand into private hire car business.
  • In the near term, the public transport services segment remains the growth driver, with contributions from new bus services and higher rail revenue in Singapore, along with higher revenue from overseas operations.
  • Maintain NEUTRAL with a higher Target Price of SGD2.20, from SGD1.98, a 6% downside. The stock offers a 4.8% dividend yield.

1Q18 was below expectations.

  • ComfortDelGro’s 1Q18 profit of SGD66.3m accounted for 21%/22% of our and consensus’ 2018 profit estimates. A lower than estimated performance of taxi business was the key reason for earnings disappointment. 
  • SGD4.8m y-o-y decline in EBIT to SGD95.7m as largely due to SGD3.8m and SGD2.8m decline in EBIT from taxi and automotive engineering businesses, respectively. This was offset by a higher profit from public transport services.

Public transport services (PTS) segment remains the key revenue growth driver.

  • PTS revenue increased by 9% y-o-y to SGD611m in 1Q18 due to higher fees earned under the Bus Contracting Model with higher operated mileage and higher ridership from rail with the completion of the Downtown Line (DTL). PTS is expected to remain the key growth driver for ComfortDelGro with contributions from Seletar Bus Package and Bukit Merah Bus Package in 2Q18 and 4Q18 respectively. 
  • While the rail service is expected to see higher revenue from DTL, the recently announced fare reduction and transition of North East Line to New Rail Financing Framework will continue to weigh down on its profitability.

Taxi business to stabilise amidst a more rational competition.

  • ComfortDelGro indicated that the competitive landscape in taxi business has rationalised, following the departure of Uber. There has been a small but visible improvement in demand for taxis with ComfortDelGro witnessing a net addition of taxi drivers to its fleet. 
  • ComfortDelGro has stopped scraping older taxis and has ordered 200 new taxis. With a sharp reduction in fleet size, the idle rate has remained stable at 2%-3%. 
  • ComfortDelGro has also seen a small improvement in taxi EBIT margin amidst a disappearance of holding cost for idle taxis and lack of impairment costs seen in 4Q17.

Need for a definitive private car hire strategy.

  • We concur with ComfortDelGro that it needs to have a presence in the private hire car business. However, ComfortDelGro is still negotiating its deal with Uber on the acquisition of the LCR’s fleet. 
  • Recent news report also suggested that ComfortDelGro is in talks with Go-Jek to ensure that it could run the fleet with Go-Jek's app. We believe ComfortDelGro needs to finalise a definitive strategy for private hire car business soon.

Maintain our NEUTRAL rating

  • While we maintain our NEUTRAL rating, we believe that ComfortDelGro’s announcement of a definitive strategy to expand into private hire car business could re-rate the stock. 
  • We increase 2018F-2020F earnings by 11%-14% to account for higher revenue from public transport services and a stable outlook for Singapore taxi business as compared to our prior expectation of a decline in revenue.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-14
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.20 Up 1.980