ComfortDelGro - DBS Research 2019-02-13: Stronger Than Expected Performance


ComfortDelGro - Stronger Than Expected Performance

  • ComfortDelGro’s 4Q18 growth was more robust than expected (+40% y-o-y).
  • Final DPS of 6.5 Scts proposed, implies payout ratio of 75%.
  • Expect growth to continue into FY19, helped by recent acquisitions, fare increases, and bottoming out of taxi fleet contraction.
  • Upside to earnings revision, regulations for taxi/ private hire vehicles could be catalyst; Maintain BUY, Target Price: S$2.57.

What’s New

4Q18’s strong growth helped FY18 to record a marginal increase in earnings.

  • COMFORTDELGRO CORPORATION LTD (SGX:C52) reported FY18 headline net profit of S$303.3m on the back of a 6.4% increase in revenue to S$3.8bn.
  • In fact, 4Q18 performance was above expectations, with a robust 40% y-o-y increase in net profit to S$83.5m, the first y-o-y increase in the past 7 quarters since 1Q17. This is an affirmation to our thesis that the bottom may have passed for ComfortDelGro, in our view.
  • The strong performance was led by contribution of its Public Transport Services Business, net gain from surrender of a lease of its inspection testing business, and acquisitions.

Growth in 4Q18 to continue into 2019.

  • In line with ComfortDelGro’s performance in 4Q18, we expect the reversal to a growth profile to continue into FY19F, albeit not at the high rate seen in 4Q18.
  • We project net profit to grow by 4% in FY19F, from 5% decline seen in FY17 and marginal 1% growth FY18. This would be driven by
    1. the recent 4.3% increase in public transport fares in Singapore effective 29 December 2018; and
    2. recent acquisitions, particularly in Australia.

Final DPS of 6.15Scts, payout ratio of 75%.

  • A final dividend per share of 6.15Scts was proposed, and coupled with the 4.35 Scts paid at the interim, total DPS for FY18 amounted to 10.5 Scts (FY17: 10.4 Scts). This represents a payout ratio of 75%, similar to FY17.

Overseas contribution amounted to 41.1% of group revenue with Australia contributing bulk (64.4%) in FY18.

  • Since late 2017, ComfortDelGro has invested S$392.4m in acquisitions in Australia, forming the bulk of its total investments of S$479m across the various geographical reas.

Group revenue driven by new acquisitions and Public Transport segment.

  • In FY18, the 6.4% y-o-y increase in group revenue (+S$228.8m) was contributed by its existing business ($S104.6m) and new acquisitions (S$124.2m). The increase in Public Transport segments (+S$310m or 12.9%), was driven by higher mileage operated from the commencement of the Seletar and Bukit Merah Bus Packages (March 2018 and November 2018, respectively) and higher rail ridership.
  • These were partially offset by declines in Taxi (-S$106.6m) and Automotive Engineering Services (-S$21.7m).

Operating margins improved marginally to 11.5%, helped by strong showing in 4Q18.

  • Operating margins improved in 4Q18 to 11.8%, from the 9.3% registered in 4Q17. The improvement in margins in 4Q18 was largely a result of:
    1. a weak showing for taxi operations in 4Q17, which we believe arose from scrapping of vehicles;
    2. improvement in public transport services;
    3. one-off gain from land lease from its inspection services, among others.
  • As a result, 4Q18 operating profit surged by 40.8% y-o-y to S$120.2m. We believe this is confirmation of our earlier expectations that the worst is over, and we should see ComfortDelGro revert to a net profit growth trajectory.
  • For the full year, the increases in costs were largely from higher staff costs (S$1.66bn, +10.8%), energy and fuel (S$295.6m, +24.8%) and repair and maintenance (S$286.9m, +7.8%), offset partially by lower depreciation (S$394.3m, -3.5%), materials & consumables (S$131.6m, - 8.7%) and road tax (S$100.6m, -14.8%), among others.

Taxi operations still saw slight fleet contraction in 4Q; normalisation of regulation could be a catalyst.

  • ComfortDelGro’s taxi segment continued to record a decline in revenue on the back of drop in its fleet size, particularly in Singapore.
  • We note that the revenue decline in 4Q18 was only 2.7% - a much smaller magnitude compared to earlier quarters. That said, operating margins was at a commendable 18.7% in 4Q18, an improvement from 13.8%/ 18.5% in 4Q17/ 3Q18. This could be attributed to a more efficient fleet and the conversion to hybrid vehicles from diesel. Management indicated that the unhired rate remains low at c.3% for its fleet.
  • Based on LTA’s data, ComfortDelGro’s fleet stood at 12,360 (as of end-December). This was a minor contraction from its fleet as at end-Sep (12,691). Management maintains a cautious stance given the current competition environment in Singapore with the entry of Go-Jek, and, we note that it aims to maintain its fleet and market share in 2019. The new taxi orders would largely be for replacements, though it would monitor the situation should there be opportunities for fleet expansion.
  • Despite management’s guarded stance, we continue to believe the worst in taxi fleet contraction in Singapore is over and we should not see competition escalate to that seen during the times of Uber/Grab.

Public consultation ends 21 Feb 2019 for streamlining of regulations between taxis and private hire vehicles.

  • We believe the eventual streamlining of regulations between ride-hail and street-hail operators could lead to a more level playing field and provide a catalyst for ComfortDelGro’s share price.

Rail ridership up but losses remain; expect bus earnings to mitigate.

  • Ridership for rail continued to improve largely with the opening of Downtown Line Stage 3 (DTL3) since December 2017. Average daily ridership for DTL in FY18 was 450,000/day. On our estimates, 4Q18 average daily ridership would have been c.460,000/day, up from 437,000/day in 2Q18 and 431,000/day in 1Q18. Management indicated that the rail segment still saw losses in FY18, albeit marginally smaller compared to FY17.
  • The fare increase from 29 December 2018 will help rail revenues, but this segment continues to remain challenging due to higher operating and maintenance costs for North- East Line given the ageing network. That said, we expect overall improvements in the Public Transport Services Segment, on the back of improved contribution from its bus operations, to mitigate the challenges the group is facing in its rail segment.

Maintain BUY, Target Price S$2.57.

  • We maintain our BUY recommendation with Target Price of S$2.57. Our Target Price is based on average valuation using 16x FY19F PE and DCF.
  • We believe 4Q18 marks the return to y-o-y growth, after 7 quarters of declines since 1Q17, and project this momentum (albeit at a more subdued rate compared to 4Q18) to continue into FY19F. This is on the back of:
    1. bottoming out of its taxi fleet contraction in Singapore;
    2. earnings contribution from recent acquisitions; and
    3. public transport fare increase of 4.3% effective 29 December 2018.
  • Upside to FY19-20F earnings could arise from cost savings from recent acquisitions, new investments and/or contract/ tender wins, which could add to our conservative 4% profit growth projection currently.
  • ComfortDelGro also offers 4.6% for FY19F, which we believe is relatively attractive.

Risks to our recommendation.

  • Our thesis is anchored upon reversal of earnings to a positive trajectory in FY19, underpinned by bottoming of taxi fleet contraction 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/ 2019-02-17
SGX Stock Analyst Report BUY MAINTAIN BUY 2.57 UP 2.560