ComfortDelGro - DBS Research 2018-11-12: Earnings To Turn Up From 4Q18 Onwards


ComfortDelGro - Earnings To Turn Up From 4Q18 Onwards

  • ComfortDelGro's 3Q18 net profit shows sequential improvement as expected; expecting reversion to growth from 4Q18.
  • Revised earnings up by 3% on acquisitions, fare increase effective 29 December 2018.
  • Setting up US$100m corporate venture fund.
  • Maintain BUY, Target Price: S$2.56, yields of 4.8%/5.2%.

Maintain BUY, Target Price raised to S$2.59.

  • We maintain our BUY recommendation with a revised Target Price of S$2.56, as we project earnings to register y-o-y growth from 4Q18 onwards, and into FY19F. This is on the back of:
    1. bottoming out in taxi fleet contraction in Singapore;
    2. earnings contribution from recent acquisitions;
    3. public transport fare increase of 4.3% effective 29 December 2018.
  • As can be seen in 3Q18 results, while still registering y-o-y declines in profits, this is of a smaller magnitude seen in 1Q/2Q18, indicating sequential improvement.
  • ComfortDelGro also provides a yield of 4.8%/5.2% for FY18F/19F, which we believe is relatively attractive.

Where We Differ: Competition unlikely to heighten.

  • While there are concerns on increased competition from the private hire car companies with the impending entry of Go-Jek, we do not expect the situation to revert to the times of Grab/Uber.

Potential Catalysts:

  • A stronger-than-expected expansion in taxi fleet, and/or partnership with private ride-hailing companies could be catalysts.
  • Regulatory changes could aid its taxi operations. Inorganic growth acquisitions could also support its growth profile. Conversely, a pick-up in competitive pressure could lead to further contraction in its taxi fleet.


  • Our target price is revised to S$2.56, on the back of a 3% upward adjustment in our earnings forecasts, offset by pegging our valuation to PE of 16x FY19F earnings, which is - 1SD to its 5-year historical average.
  • Our Target Price is based on average of discounted cash flow (DCF) and price-earnings ratio (PE) valuation methods.

Key Risks to Our View:

  • Heighten and prolonged irrational competition from private hire booking leading to further contraction in taxi fleet, loss of bus contracts, changes in regulations on operations, and currency swings may impact our forecast.

WHAT’S NEW - Smaller decline as expected; earnings to turn up from 4Q18

3Q18 results within expectations; sequential improvement and smaller decline as expected.

  • ComfortDelGro (CD) reported a headline net profit of S$78.5m, down by 2% y-o-y, on the back of a 8.5% increase in revenue to S$967.9m. While still showing y-o-y decline in profits, this is as per our earlier expectations and it is of a smaller magnitude as that seen in 1Q/2Q18. It also adds confirmation signs that the bottom may have passed for the group.

Project a reversal to growth from 4Q18, into FY19F.

  • We raised our earnings by 3%/1% for FY19F/20F, factoring in
    1. the recently announced 4.3% increase in public transport fares in Singapore effective 29 December 2018; and
    2. recent acquisitions, particularly in Australia.
  • This is offset partially as we dialed back our assumptions on taxi fleet marginally to 13,000/13,200 in FY19F/20F, from 13,200/13,500 previously.
  • All in, we expect it to post a reversal to growth of 8% in FY19F, after a 3% drop in FY18F.

Group revenue driven by Public Transport, new acquisitions.

  • As per the trend seen in 1H18, the increase in revenue was mainly on contributions from its Public Transport segments (+S$91.4m), which in turn was driven by higher mileages operated due to the commencement of the Seletar Bus Package (March 2018) and higher rail ridership. These were partially offset by declines in Taxi (-S$16.6m) and Automotive Engineering Services (-S$2.3m).

Operating margins dipped marginally to 11.7%, from 12.5% a year ago.

  • Operating margins dipped slightly by 0.8ppt to 11.7% in 3Q18, from 12.5% a year ago. The increases in costs were largely from higher staff costs (S$417.7m, +12.8%), energy and fuel (S$79.4m, +36.2%) and repair and maintenance (S$74.6m, +12.2%), offset partially by lower depreciation (S$97.7m, -5%) and road tax (S$25m, -14.7%), among others.
  • Operating profit ended 2Q18 at S$113.4m, up by 1.7% y-o-y, which is the first y-o-y increase in the past seven quarters. We believe this reaffirms our expectation that the worst is over, and we should see the group revert to a growth trajectory in net profit from 4Q18 onwards.

Taxi operations seeing smaller decline; fleet shows minor uptick from end 2Q18.

  • Similar to the previous few quarters, CD's taxi segment continued to show decline in operating profit but at a smaller clip.
  • Based on LTA’s data, CD’s fleet stood at 12,691 (as of end-September), which is a minor improvement from 12,535 as at end-June. This compares favourably against the huge q-o-q decline seen since early last year, and indicates that taxi fleet contraction has bottomed out.

Competition fairly quiet for taxi and private hire vehicles.

  • Management updated that they are currently not witnessing major movements in taxi drivers’ recruitment and resignation at current stage. The Group’s taxi fleet idle rate remains similar to 1H18, at c.2%. Other than its knowledge that Go-Jek has tied up with several private car rental companies as well as pre-registration of interested drivers, management indicated that they are not aware and has not heard of moves by the potential entrant. Management opine that they are not too concerned as well as its view that competition should not revert back to previous time. Nonetheless, they stand ready to respond should there be changes.

Rail ridership up, losses remain.

  • Ridership for rail continued to improve largely with the opening of Downtown Line Stage 3 (DTL3) since December 2017. 3Q18 average daily ridership for DTL was at 472,000/day, up from 437,000/day in 2Q18 and 431,000/day in 1Q18.
  • Management indicated that while the fare increase from 29 December 2018 will help in rail revenues, this segment remains challenging due to higher operating and maintenance costs for North-East Line given the ageing network.
  • Going forward, the estimated breakeven ridership for DTL is around 600,000-650,000/day.

Initiating US$100m corporate venture fund.

  • On top of its results announcement, the group has also announced the setting up of a corporate venture fund. The fund will focus on incubation and investments in mobility technologies and solutions, which will complement the group's land transport business.
  • At the same time, it could provide the group with new strategic capabilities. We understand that the US$100m is a target, and the fund, currently managed in-house, will progressively make bite-sized investments. This should not put any strain on its cash flow and dividend payout ratio.
  • In our view, while we do not expect significant near-term earnings impact from this initiative, we believe management is taking a more proactive step in tapping into possible ventures that could benefit the group in the longer term.

Maintain BUY, Target Price adjusted to S$2.56.

  • We maintain our BUY recommendation with a revised Target Price of S$2.56. Our Target Price is based on average of 16x FY19F PE (previously 18x FY18F/19F) and DCF.
  • We project
    1. earnings to register y-o-y growth from 4Q18 out in taxi fleet contraction in Singapore;
    2. earnings contribution from recent contribution; and
    3. public transport fare increase of 4.3% effective 29 December 2018.
  • ComfortDelGro also provides yields of 4.8%/5.2% for FY18F/19F, which we believe is relatively attractive.

Key thesis: Competition unlikely to revert to that of Grab/Uber period.

  • While there are concerns on increased competition from the private-hire car companies with the impending entry of Go-Jek, we believe that a strong escalation of competition and reversion to high incentives and discounts (where participants incur sustained losses) is unlikely.
  • For one, having seen a full cycle of entrants and eventual exits (since 2013 with Uber's entry) of private-hailing app players, taking over/buying out competition to achieve profitability seems to be face regulatory scrutiny, as the Uber/Grab case suggests. That leaves a “death-match”, in our view.
  • In addition, in view of a relatively small market in Singapore, the business case for new entrants may seem limited vis-à-vis other larger ASEAN markets.
  • Lastly, the total taxi fleet in Singapore has contracted substantially by a quarter since December 2016, and has stabilised at c.21,000 since 1Q18, which may suggest that a core pool of taxi drivers are reluctant to switch. In addition, while the promotions/incentives by private car hire may be attractive, it could be seen as temporary and could dissipate as fast as the exit of a competitor.

Risks to our recommendation.

  • Our thesis is anchored upon reversal of earnings to a positive trajectory in FY19, underpinned by an increase in taxi fleet and further improvements in public transport contributions. As such, key risks include a 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/ 2018-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 2.56 DOWN 2.590