ComfortDelGro - DBS Research 2018-08-13: Sequential Improvement In 2Q As Earlier Expected

COMFORTDELGRO CORPORATION LTD SGX:C52

ComfortDelGro - Sequential Improvement In 2Q As Earlier Expected

ComfortDelGro’s 2Q18 results within expectations; smaller drop as anticipated earlier is confirmation that we are pass the bottom.
Singapore buses mitigated decline in taxi; expect taxi ops to show sequential improvements on fleet expansion.
Interim dividend of 4.35 Scts declared, similar to last year.
Maintain BUY, Target Price: S$2.59.

ComfortDelGro’s reported headline net profit of S$75m, down by 5.5% y-o-y, on the back of 5.4% increase in revenue to S$941.1m.
While still showing y-o-y decline in profits, this is in line with our expectations and is of a smaller magnitude as that seen in 1Q18.
It is also a confirmation that the earnings bottom may have passed for the group, and we continue to expect a reversal to growth of 5% in FY19F, after a 3% drop in FY18F.

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ComfortDelGro’s 1H18 formed 48% of our forecasts, and we expect 2H18 to show sequential q-o-q improvement on the back of higher bus contributions, increase in taxi fleet and recent acquisitions. We maintain our BUY recommendation with a Target Price of S$2.59.
Interim dividend per share of 4.35 Scts was declared, similar to last year.
For the full year, we expect a marginally higher payout ratio of 78%, vs FY17’s 75%, implying a yield of 4.7%.

The increase in revenue was mainly on contributions from its Public Transport segments (7.4% y-o-y; +S$66.1m), which in turn was driven by higher mileage operated due to the commencement of the Seletar Bus Package (Mar’18) and higher rail ridership.
In addition, new acquisitions also contributed S$20.4m or 2.3% y-o-y to topline, but these were partially offset by drops in Taxi (-3.5%; -S$31.6m) and Automotive Engineering Services (-1.2%; -S$10.7m).

ComfortDelGro’s operating margins dipped slightly by 0.9ppts to 11.6% in 2Q18, from 12.5% a year ago. The notable increases were from higher staff costs (S$403.4m, +9.6%), energy and fuel (S$75.8, +35.8%) and repair and maintenance (S$72m, +13%), offset partially by lower depreciation (S$97.4m, -4.8%), consumables (S$32.8m, - 14.6%), road tax (S$24.5m, -17.5%), among others.
Operating profit in 2Q18 was S$109.5m, down by 2.1% y- o-y, but at a smaller clip compared to the y-o-y drop in 1Q18 (-4.8%).

As per the previous few quarters, taxi segment contributed to the bulk of decline in operating profit given the lower operating fleet in Singapore.
Based on LTA data, ComfortDelGro’s fleet stood at 12,535 (as of end June), only a tad lower than a quarter back in Mar (12,687). This compares favourably against the huge q-o-q decline seen since early last year, and is a signal that the taxi fleet contraction has bottomed out. Idle rate remains similar to 1Q18, at c.2%.

Ridership for rail continued to improve largely with the opening of Downtown Line Stage 3 (DTL3) since Dec’17, with average daily ridership at 437k/day in 2Q18 (1Q18: 431k/day).
Management indicated that rail operations remain challenging given the fare reductions implemented last Dec, coupled with higher operating and maintenance costs.

The group has been relatively active recently in pursuing inorganic growth opportunities. The latest acquisition in Australia (8 Aug 2018 - ComfortDelGro: Further acquisitions Down Under) was not surprising to us, given its previously stated stance.
In addition, we believe management is likely to focus on bite-sized deals in markets and industries in which they are familiar with. We have not factored in further acquisitions in our forecast, and this could be a catalyst for share price, along with reversal to growth in its taxi operations.

We maintain our BUY recommendation and Target Price at S$2.59.
We project the sequential improvement to continue into 2H18, on the back of
1. increased contributions from Public Transport Services, particularly buses in Singapore;
2. increase and introduction of newer taxi fleet;
3. contributions from acquisitions since start of FY18.

Our thesis is anchored upon reversal of earnings growth to a positive trajectory in FY19, underpinned by increase in taxi fleet and further improvements in public transport contributions. As such, a key risk is the reversal of outlook leading to continued contraction in taxi fleet, amid a renewed competitive landscape from private ride hailing.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2018-08-13

SGX Stock Analyst Report BUY Maintain BUY 2.590 Same 2.590