ComfortDelGro - DBS Research 2018-07-04: Opportunity To Board

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COMFORTDELGRO CORPORATION LTD SGX:C52

ComfortDelGro - Opportunity To Board

• A window of opportunity to accumulate with recent retreat in ComfortDelGro’s share price.
• Receding competition threat in taxi likely to sustain; further expansion a price catalyst.
• Project earnings to revert to growth in FY19F; public transport resilient through economic cycles.
• Upgrade to BUY, Target Price: S$2.59, current yield at 4.6%.

Upgrade to BUY, Target Price raised to S$2.59.

• We upgrade our recommendation to BUY from HOLD, and a revised Target Price of S$2.59, on the back of:
  1. bottoming out in taxi fleet contraction in Singapore with potential increase;
  2. earnings upside revision from further acquisitions.
• Looking into 2Q18, while we still expect the group to post y-o-y declines in profits, we expect them to be of a smaller magnitude vis-à-vis that seen in 1Q18, suggesting improvement in operations. We project operations to improve sequentially in 2H18, reversing back into growth profile in FY19F.
• With competition ceding, we believe downside risks are limited, coupled with its public transport exposure which is relatively resilient through economic cycles.

Where we differ: High DPS despite lower profits.

• We are at the lower end of consensus in terms of our earnings forecasts, likely due to a more conservative view on taxi fleet size and rail contribution leading to a marginal contraction in FY18F earnings. 
• However, we believe DPS will increase marginally on the back of a higher payout ratio, providing yields of c.4.6%, thus supporting ComfortDelGro’s share price.

Potential catalysts:

• A stronger-than-expected expansion in taxi fleet, and/or partnership with private ride-hailing companies could be catalysts. Regulatory changes could aid its taxi operations. Inorganic growth acquisitions could also support its growth profile.
• Conversely, a pick-up in competitive pressure could lead to further contraction in its taxi fleet.

Valuation:

• Our target price is revised to S$2.59, on the back of a 4% upward adjustment in our earnings forecasts, coupled with revising our valuation to average PE of 18x FY18F/19F earnings.
• 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 - Looking towards a smoother ride

Towards a smoother ride, upgrade to BUY, TP: S$2.59.

• The trend of rapid taxi fleet contraction seen since late 2016 seems to be firmly over, in our view. While we expect ComfortDelGro’s profits, particularly in 2Q18F, to still show a y-o-y decline, it should be of a lower magnitude seen in 1Q18 (-20% y-o-y).
• Looking into FY19F/20F, we project profits to increase by 5% per annum, from a 3% decline in FY18F. We have revised up our net profit projections by 4% for FY18F/19F mainly on the back of:
  1. higher taxi fleet assumption;
  2. contribution from recent acquisitions.
• While ComfortDelGro’s share price has performed well, up by 16% YTD and a reversal from the c.25% drop in 2017, we expect upside catalyst from further expansion in taxi fleet, coupled with potential upside from acquisitions. 
• Current dividend yield at 4.6% (assuming 78% payout) should cushion downside risk in share price. We believe the recent retreat in ComfortDelGro’s share price presents a window of opportunity to re-enter this counter.

Taxi fleet contraction stabilised.

• With the exit of Uber, it seems that the worst for ComfortDelGro’s taxi operations is over. As of April figures, ComfortDelGro’s Singapore taxi fleet stood at 12,627.
• Though it is still down from 15,800 in April 2017, this has stayed somewhat flat compared to March 2018 (12,687).

ComfortDelGro’s Singapore taxi fleet should move back up to 13,000, in our view.

• ComfortDelGro recently announced that it was placing orders for 700 new taxis. Of these, we understand that the initial 200 taxis have been delivered and are already rented out. 
• The remaining orders for the other 500 have yet to be awarded, but we believe they are likely to be introduced over the course of 2H18. With that, we expect total fleet to hover back up to c.13,000 by the close of 2018. Hence, we raised our average taxi fleet assumption to 12,800 and 13,200 for FY18 and FY19 respectively, from 12,500 and 12,000 previously.

Reduced promos by competition and higher TDVLs a positive sign.

• Based on our checks and anecdotal evidence, we understand Grab has reduced drivers’ incentives and marketing promotions, that would result in lower income for Private Hire Car (PHC) drivers, making it less lucrative.
• In addition, we also saw a net increase in total number of 388 Taxi Driver’s Vocational Licence (TDVL) holders to 95,895 in April 2018 – a first since December 2016. We believe this trend should continue and will bode well for ComfortDelGro’s taxi operations.

Further escalation of competition unlikely.

• There have been media reports that Go-Jek is looking to enter Singapore, and the widely speculated partner for Go-Jek is ComfortDelGro. While it seems sensible, there has been no confirmed indications of this. That said, we believe that the likelihood of irrational competition is low given Grab's already-dominant position. 
• In fact, Go-Jek has established local companies for Vietnam and Thailand, but we have yet to see its progress in Singapore.

A partnership with potential entrant Go-Jek could catalyse share price.

• We believe that in the event Go-Jek eventually starts operating in Singapore and in partnership with ComfortDelGro, this could provide a catalyst for share price as it could be seen as an additional avenue for ComfortDelGro to be within the private car hire space. This could complement its existing taxi business, as well as other ancillary businesses such as automotive engineering, insurance, and vehicle inspection, among others.

Valuation & Recommendation

Raised profit forecasts by 4% for FY18F/19F.

• Our revenue projections are revised down by c.4.5%/2.7% to reflect the adopted SFRS1 on revenue recognition. However, we have raised our profit forecasts by 4% each for FY18F/ 19F, and now project a smaller decline of 3% in profits for FY18F, coupled with a reversal to growth of 5% for FY19F. This is on the back of:
  1. bigger taxi fleet in Singapore, from a decline previously;
  2. contribution from its recent acquisitions amounting to c.S$107m since February 2018.

Window of opportunity; upgrade to BUY, Target Price raised to S$2.59.

• While share price has outperformed the overall market YTD, it has retreated from its recent high achieved in May. See Straits Times Index Constituents Share Price Performance. We believe there should be further upside and re-rating catalyst moving into FY19F as the group returns to its earnings growth trajectory.
• On the back of higher earnings projections and revision in earnings multiple, we raised our Target Price to S$2.59. This is based on the average of 18x FY18F/19F PE and discounted cashflow (WACC 9.1%, terminal growth 0.5%).
• At current price, the counter provides a yield of c.4.6%/4.8% for FY18F/19F, based on our payout assumption of 78%/80% respectively.

Key risks:

• Resumption of intense competition from the private car hire/private car hailing app space, impacting on taxi rental and demand, further cuts in government budget, impacting on public transport service particularly for its overseas markets.

Andy SIM CFA DBS Vickers | https://www.dbsvickers.com/ 2018-07-04

SGX Stock Analyst Report BUY Upgrade HOLD 2.59 Up 2.120