ComfortDelGro Corp Ltd - Phillip Securities 2018-08-13: Organic And Inorganic Growth To Drive A Better 2H18

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COMFORTDELGRO CORPORATION LTD SGX:C52

ComfortDelGro Corp Ltd - Organic And Inorganic Growth To Drive A Better 2H18

• ComfortDelGro's 2Q18 revenue 4.0% higher than estimated; 2Q18 PATMI within our expectation
• 1H18 revenue and PATMI met 51% and 46% respectively of our full year FY18 estimate
• Expect 2H18 PATMI to be stronger than 1H18, due to full 6-month contribution from Seletar bus package, ramp-up of DTL ridership and new subsidiaries
• 4.35 cents/share interim dividend declared, same as last year
• Maintain ACCUMULATE; new target price of S$2.78 (previously $2.69) after tweaking our assumptions for contribution from acquisitions

The Positives

+ Public Transport Services segment benefitted from 52.9% y-o-y higher profit by SBS Transit.

• This was underpinned by the commencement of the Seletar bus package in March 2018, operation of bridging shuttle services for early closure and late opening of the East-West MRT Line and higher ridership on Downtown Line (DTL).

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+ Taxi segment stabilised with a more rational competition landscape.

• The fleet idle rate of 2% in 2Q18 was lower than the 3%-5% during FY17, as older taxis were scrapped, thus matching supply with demand. This also aided to rationalise cost for the Singapore Taxi business. The combined Comfort and CityCab fleet of 12,535 taxis as at end-June is 19.4% lower y-o-y.

+ Absolute level for dividend maintained at 4.35 cents/share, despite the lower y-o-y EPS.

• Consequently, payout ratio of 67% over 1H18 EPS is higher than last year's 58%. The Group’s ability to maintain the absolute level of dividend despite lower EPS is underpinned by the strong cash-generating nature of the business. 
• ComfortDelGro generated 10.1 cents/share of free cash flow in 1H18 vs. 1H17: 5.3 cents/share.

The Negatives

Increase in opex outpaced the increase in revenue, resulting in y-o-y margin compression from 12.5% to 11.6%.

• Management alluded this to transitional integration costs for the new acquisitions. We believe the transition of North-East Line, Punggol LRT and Sengkang LRT to the new rail financing framework (NRFF) effective April 1 also contributed to the margin compression. 
• The NRFF has a profit cap and collar structure which limits EBIT margin at 5%, compared to the mid- to high-teen margin under the legacy licence condition. 
• Higher non-controlling interest attributable to SBS Transit also weighed against PATMI.

Goodwill on balance sheet increased 16.4% YTD as a result of acquisitions.

• Consequently, goodwill now accounts for 10.5% of total assets, compared to 10-year historical average of 5.5%. The increase in goodwill is an effect of inorganic growth, and we estimate it to reach 11.7% of total assets by the end of FY18, in line with the Group’s aggressive acquisition strategy.

Inventory build-up could lead to negative surprise of higher than expected maintenance-related expenses.

• Inventory by percentage of total assets has crept up to 2.7% – almost double of the 10-year historical average of 1.5%. Inventory build-up has been for mid-life maintenance of buses and rolling-stock.

Outlook

The outlook is positive.

• Expect 2H18 to be stronger than 2H18 due to organic and inorganic growth. Public Transport Services segment will recognise full 6-month contribution from Seletar bus package and DTL loss continue to moderate. Taxi business to stabilise, with the worst being over, following the consolidation in the ride-hailing industry.
• Sources of inorganic growth which started contributing in 2Q18 are National Patient Transport (non- emergency ambulance), AZ Bus (bus charter), Tullamarine Bus Lines (public bus) and Dial-a-Cab (taxi circuit).
• Other sources of inorganic growth expected to start contributing in 3Q18 are Western Sydney Repair Centre, Nanjing ComfortDelGro Qixia Driver Training, Ric-Tat Travel & Coach Services (bus charter) and FCL Holdings (public bus).

Maintain ACCUMULATE; new target price of $2.78 (previously $2.69)

• Tweaked our assumptions for contribution from acquisitions. Our FY18e/FY19e revenue is +3.7%/+5.8% from previous estimate, and PATMI is -0.7%/+2.4% from previous estimate. 
• Our new target price gives an implied FY18e forward P/E multiple of 19.7 times.
• The 10.4 cents full year dividend is sustainable, supported by positive free cash flow.

Richard Leow CFA Phillip Securities Research | https://www.stocksbnb.com/ 2018-08-13

SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 2.78 Up 2.690