ComfortDelGro - CGS-CIMB Research 2018-08-10: Powered Up By Acquisition Spree

COMFORTDELGRO CORPORATION LTD SGX:C52

ComfortDelGro - Powered Up By Acquisition Spree

ComfortDelGro’s (CD’s) 2Q18 results deemed in line with expectations, with 1H18 PATMI forming 49%/46% of our/consensus full-year forecast.
It has made c.S$282m worth of acquisitions YTD, including an A$110m purchase of FCL Holdings (to complete by end-Sep), that will likely further boost earnings ahead.
Recovery in taxi fleet growth to further underpin earnings growth ahead.
Healthy balance sheet with S$220m net cash supports further M&A pursuits.
Transfer of analyst coverage; we upgrade from Hold to ADD with a higher DCF-based Target Price of S$2.75, with FY18-20F EPS forecasts up 2.9-11.1% to factor in acquisitions.

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ComfortDelGro’s 2Q18 PATMI dipped 5.5% y-o-y to S$75.0m despite revenue gain of 5.4% y-o-y, mainly dragged down by lower taxi earnings but otherwise appears to remain on a recovery ptrend after earnings bottomed out in 4Q17.
ComfortDelGro reported stronger public transport services earnings that were attributed to higher fees earned from recent commencement of the Seletar Bus Package.
An interim DPS of 4.35 Scts was declared, maintained from previous DPS in 2Q17.

ComfortDelGro’s taxi fleet stood at 12,535 as at end-Jun and will be taking delivery of 200 new hybrid taxis by end-Aug. Orders for further 1,000 taxis is expected to be delivery by 2019.
Post the Grab-Uber merger amid lessened competitive pressure from the Private-Hire Car (PHC) segment, we think ComfortDelGro’s taxi fleet is set for a return to growth in 2H18 and could scale back up to c.13,000, net of deregistered taxis, by end-Dec 18, in our forecasts.

ComfortDelGro has made c.S$282m worth of acquisitions YTD that would potentially contribute to earnings in our forecast period. The latest round of acquisitions as well as its largest acquisition bid (A$110m) was for an Australian bus business, FCL Holdings, that would add 220 buses to its fleet of 1,259 vehicles in New South Wales.
Coupled with earnings accretion from its other acquisitions, we anticipate higher profit contributions from its overseas bus businesses ahead.

ComfortDelGro’s balance sheet remains robust with a net cash of S$298m as at end-Mar 18, providing ample ammunition to pursue more attractive acquisitions to enhance future earnings growth profile.
Strong free cash flow generation of c.S$350m-400m p.a. over FY18-20F should support its dividend yield of 4.4-4.9% in FY18F-20F period.

Factoring in profit contributions from its acquisitions as well as higher taxi EBIT as we now expect a higher growth trajectory in its taxi fleet by end-Dec 18, we raise our FY18- 20F core EPS by c.2.9-11.1% in our forecast period.
We project core PATMI to grow 2.8- 10.0% y-o-y for FY18-19F on expectations of a stronger turnaround in its taxi business and growing bus and rail operations for ComfortDelGro with acquisition-related profit contributing 0.7- 4.0% to our forecasts.

Following a transfer of analyst coverage, we now look to a strong recovery in FY19F earnings and upgrade our call from Hold to ADD with a higher DCF-based Target Price of S$2.75 (WACC: 7.4%), which represents 18.1x FY19F P/E.
Re-rating catalysts include more earnings-accretive M&As, upward rail fare revision and higher dividends.
Key downside risks include a pick-up in private–hire car competition which could lead to deterioration in ComfortDelGro’s taxi earnings.

Colin TAN CGS-CIMB Research | Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-10

SGX Stock Analyst Report ADD Upgrade HOLD 2.75 Up 2.370