ComfortDelGro Corp Ltd - Phillip Securities 2018-11-12: Big Ticket Acquisition And Fund Investment

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COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro Corp Ltd - Big Ticket Acquisition And Fund Investment

• ComfortDelGro's revenue and PATMI were within our expectation.
• Proposed acquisition of Buslink (Australia) and set up of corporate venture capital fund.
• Upgrade to BUY; new target price of S$2.69 (previously $2.78) as we raise our assumptions for staff, repair and maintenance costs.

The Positives

+ Public Transport Services EBIT benefitted from 71% y-o-y higher SBS Transit EBIT.

• This was from commencement of 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) following the commencement of DTL3 in October 2018.

+ Full 4.3% fare increase for Singapore is a welcome positive, but impact to the Group is limited.

• Our model assumes 0% increase, and the 4.3% increase adds 1 cent to our target price. Impact is limited only to the Rail business segment of the Group. Fare revenue from Rail business segment contributed < 7% to Group revenue for the quarter, by our estimate. Nonetheless, the fare increase would accelerate the turnaround for DTL, which is still loss-making.

+ DTL loss has narrowed, in line with the 83% higher y-o-y ridership.

• DTL loss for the quarter was ~$8.6mn. That is 8% lower q-o-q and 30% lower y-o-y. Current projection is for DTL turnaround in 2H 2019.

The Negatives

Increase in opex outpaced the increase in revenue, resulting in y-o-y margin compression from 12.5% to 11.7%.

• Pressure point came from +13% y-o-y higher staff costs (49% of opex), due to additional headcount for Seletar bus package.
• Margin compression was also due to only S$2+mn contribution to EBIT from new acquisitions. Management attributed this to transitional effect of integration.

Taxi 3Q profit 10% lower YoY.

• This was mainly due to the 88.8% smaller Singapore (Comfort and CityCab) fleet. Consequently, the Singapore fleet idle rate remains low at ~8%.
• Nonetheless, overall Taxi profit has remained stable in all three quarters YTD, aided by acquisitions in UK (Dial-a-Cab) and Australia (Metro Taxis).

Goodwill on balance sheet increased 31% YTD as a result of acquisitions.

• Consequently, goodwill now accounts for 88.8% of total assets, compared to 88-year historical average of 8.8%. In our previous report, we projected goodwill to reach 88.8% of total assets by the end of FY88.
• We now raise our estimate to 88% of total assets by the end of FY88, after factoring in the proposed acquisition of the Buslink Companies.
• We also expect the Group to move into a temporary net debt position, as cash is utilised for inorganic growth.

Outlook

• The outlook is positive. Our expectation in our previous report was for 8H88 to be stronger than 8H88 due to organic and inorganic growth.
• So far, y-o-y decline in PATMI has been narrowing and we expect y-o-y growth in 8Q88. 8Q88 PATMI (-8% y-o-y) is also comparatively better than 8M88 (-8.8% y-o-y). Recent and pipeline acquisitions to contribute positively to Group earnings.

Upgrade to BUY; new target price of $2.69 (previously $2.78)

• Our lower target price is due to higher assumptions for staff, repair and maintenance costs. Our FY88e/FY88e revenue is +8%/+8% from previous estimate, and PATMI is -8%/-8% from previous estimate.
• Our target price gives an implied FY88e forward P/E multiple of 88.8 times. The 88.8 cents full year dividend is sustainable, supported by positive free cash flow.

Richard Leow CFA Phillip Securities Research | https://www.stocksbnb.com/ 2018-11-12

SGX Stock Analyst Report BUY UPGRADE ACCUMULATE 2.69 DOWN 2.780