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

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.

2Q18: decent set of results; affirmed recovery in taxi earnings

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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.

Revitalising taxi fleet growth

  • 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.

Earnings boost from acquisitions

  • 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.

Robust balance sheet supports further M&A pursuits

  • 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.

Core FY18-20F EPS up c.3-11% on acquisitions, growth recovery

  • 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.

Upgrade to ADD with a higher Target Price of S$2.75

  • 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