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

ComfortDelGro - DBS Group 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.

What’s New

2Q18 results within expectations; smaller decline could imply worst has passed for group.

  • 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.

~ SGinvestors.io ~ Where SG investors share

Expect sequential improvement into 2H18; Maintain BUY, Target Price unchanged at S$2.59.

  • 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%.

Group revenue driven by Public Transport, new acquisitions.

  • 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).

Operating margins dipped marginally to 11.6%, from 12.5% a year ago.

  • 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%).

Taxi fleet hovering around 12,500, idle rate at 2%.

  • 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%.

Rail ridership up, though losses remain.

  • 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.

Acquisitions to complement growth.

  • 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.

Maintain BUY, Target Price remains at S$2.59.

  • 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.

Risks to our recommendation.

  • 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