ComfortDelGro Corporation - UOB Kay Hian 2018-08-13: 2Q18 Results In Line; Public Transport Lifts The Boat

ComfortDelGro Corporation - UOB Kay Hian Research 2018-08-13: 2q18 Results In Line; Public Transport Lifts The Boat COMFORTDELGRO CORPORATION LTD SGX:C52

ComfortDelGro Corporation - 2Q18 Results In Line; Public Transport Lifts The Boat

  • ComfortDelGro delivered 2Q18 net profit of S$75.0m (-5.5% y-o-y), in line with and representing 26% and 25% of our and consensus full-year earnings. 
  • Despite the y-o-y decline, improvements were seen from the public transport segment in the form of better operating margins. This was driven by the bus business as rail is likely to turn around in 2019. Its Singapore taxi business remains in gradual recovery. We revise earnings up by 3-5%. 
  • Maintain BUY on a total return basis, with target price revised to S$2.59.



2Q18 RESULTS


2Q18 net profit of S$75.0m, within expectations.

  • ComfortDelGro (CD) reported net profit of S$75.0m (-5.5% y-o-y, +13.1% q-o-q), which also included a forex gain of S$1.8m. 
  • Results formed 26%/25% of UOBKH/consensus estimates, and was in line with expectations The q-o-q earnings improvement was driven by higher revenue and operating profits from the public transport segment. 
  • Acquisitions were understood to have a marginal impact on operating profits in 2Q18.



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Singapore taxi business stable, higher margin due to subsidy payment.

  • The taxi segment reported revenue of S$185m (-12% y-o-y. +2% q-o-q), and showed stabilisation on a q-o-q basis. Operating profit of S$32m (+7% q-o-q) reflected a margin of 17.4%, and was higher on a q-o-q basis due to a subsidy received for its China business. 
  • At the Singapore level, operating margins for taxis was understood to be stable. Idle rate stood at 2% for 2Q18. ComfortDelGro remarked that it will be purchasing a total of 1,200 vehicles to its fleet, much of it replacements. Net addition to the fleet is expected to be 300-400 vehicles. Average fleet age stands at 3 years, while average daily rental was “slightly above S$100”.

Rail continues to languish.

  • The rail business remained unprofitable despite the transition to the New Rail Financing Framework (NRFF) for the North-East Line (NEL) and Light Rail Transit (LRT) lines. Downtown Line (DTL) remains below breakeven. Daily ridership on the DTL is about 437k, with ridership of 480k on good days. 
  • Breakeven for the DTL is expected only in 2019, as ComfortDelGro awaits the decision from the Public Transport Council (PTC) on the upward fare revision. Announcement is expected at year’s end, and the financial impact will only be fully felt in 2019.

Public transport margins improve on higher bus revenue.

  • SBS Transit (SGX:S61) saw higher revenue from higher mileage operated following the commencement of the Seletar Bus Package, and operation of bridging shuttle services for early closure and late opening of the East-West line. The sub-segment reported better profit, which raised operating margins for the public transport segment to 8.1% (2Q17: 8.0%, 1Q18: 6.9%). There was some one-off impact from the operation of the bridging shuttle service in 2Q18. 
  • Operating margins are expected to stay elevated, but moderate in 4Q18 when the Bukit Merah bus package kicks in.

Dividend of 4.35 S cents announced.

  • This represents a 66.7% payout ratio against the 1H18 earnings. The higher payout ratio was remarked to reflect ComfortDelGro’s confidence in their business outlook. We infer from this that the full-year dividend for 2018 will be at least as much, if not more than 2017’s 10.4 S cents.


STOCK IMPACT


Headwinds from taxi abating for now.

  • The worst for ComfortDelGro is largely over on the taxi front, for now. Until competition intensifies again, the taxi business is seeing a gradual recovery. Revenue is expected to trend upwards on higher average taxi rentals, as ComfortDelGro rejuvenates and expands its fleet.

Delivering growth through acquisitions, earnings pick-up only to kick in in 2019.

  • The public transport segment will see earnings pick up significantly in 2019, when the impact of higher Rail fares and full-year contributions from the Seletar and Bukit Merah bus contracts kick in. Acquisitions will also fuel the growth as their contributions hit the operating line in 2019. 
  • There is minimal impact for 2018 as acquired businesses incur integration costs. Positives for ComfortDelGro are largely priced in this year, with the upside pegged to 2019.


EARNINGS REVISION/RISK


Revise 2018-20 earnings by 3-5%.

  • With the transfer of analyst coverage, our prior earnings estimates have been reviewed. The taxi fleet is now assumed to decline by 2% for 2018, and grow by 1-3% for 2019-20. Operating margins have been tweaked upwards to reflect the better margins. 
  • PATMI estimates over 2018-20F have been revised to S$304m (+4%), S$334m (+5%) and S$341m (+3%).


VALUATION/RECOMMENDATION


Maintain BUY, with target price tweaked to S$2.59.

  • Our target price is pegged to 16.8x 2019F PE, reflecting ComfortDelGro’s long-term mean PE since 2012. Positives have largely been priced in, and upside will stem from better- or earlier-than-expected operational improvements from the public transport and taxi businesses. 
  • Dividend yield remains attractive at ~4.4%, and its defensive nature will provide share price support. 
  • With a total of 13%, we maintain our BUY recommendation.





Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-13
SGX Stock Analyst Report BUY Maintain BUY 2.59 Up 2.430



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