ComfortDelGro Corporation - UOB Kay Hian 2019-03-22: In Anticipation Of A Smoother Ride

COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro Corporation - In Anticipation Of A Smoother Ride

The taxi industry has improved slightly in recent months, in contrast to the slump seen during the days of intense competition with private hire operators. There may be brighter days ahead as proposed regulations could diminish the appeal for private hire drivers.
We assess prospects for ComfortDelGro from an uplift from the taxi segment as well as a turnaround in the Downtown Line.
Maintain BUY with a higher PE-based target price of S$2.77 (previously S$2.66).

The Singapore taxi industry looks to have picked up from the days when it faced intense competition from the private hire counterparts in recent years. According to the Land Transport Authority (LTA), the average number of taxi rides for two-shift taxis has seen a slight improvement in recent months at +0.4% y-o-y in Nov 18, +1.2% y-o-y in Dec 18 and +3.2% y-o-y) in Jan 19 after a long slump.
ComfortDelGro Corporation (SGX:C52) had a taxi fleet of 12,216 in Jan 19, vs 16,000-17,000 in 2016.

The LTA’s proposed changes released at the start of 2019 - prohibiting driver exclusivity and licensing for ride-hail services - may limit or even reduce the development of the private hire industry. Note that there are no current uniform regulations that apply to operators of ride hail services, compared to that for taxi operators, such as service quality in ride booking, passenger’s waiting time and driver’s conduct.
In our view, implementation of standards may further deter private hire drivers. This is due in part to the reduction of driver incentives provided by operators such as Grab and Gojek, making it unlikely for operators to provide further rewards for compliance.
Also, note that almost half of all private hire drivers had failed to attain their vocational licences in Jul 18.

To recap, the Downtown Line (DTL) is currently on the new rail financing framework, in which the LTA owns the rail assets. Revenue model is under the licensing charge model, in which operating surpluses are charged. This is, however, unlike the cap and collar approach for the North East Line (NEL), introduced in 2018, in which the LTA will share the shortfall in revenue, aiming to provide a “collar” for EBIT margin of 3.5%.
We estimate the DTL’s current operating losses at S$40m-45m in 2018, with operating margins of -30% to -40%. A revamp in the fare model for DTL may help to ease the timeframe for breakeven.

ComfortDelGro’s Singapore taxi business has almost halved in 2018. Going forward, the shift towards higher-rental hybrid taxis will also be positive for the segment.
We currently estimate ComfortDelGro’s 2019-20 Singapore taxi revenue at S$440m (+4.0% y-o-y) and S$455m (+3.4% y-o-y) respectively. If the 2020 taxi revenue exceeds our estimate and increases to S$465m-500m (+6 to 14% y-o-y), ComfortDelGro could be trading at a PE-based valuation of S$2.82-2.98.

Our base case assumes -10% operating margin for 2020. If the DTL’s 2020 operating performance exceeds our estimate and operating margin increases to -7.5% to +2.5%, ComfortDelGro could be trading at a PE-based valuation of S$2.79-2.87.

Maintain BUY with a higher target price of S$2.77, pegged to 17.5x 2020F (previously 16.8x), or ComfortDelGro’s long-term mean PE since 2013, rolling forward from 2012.
Current ComfortDelGro share price reflects a forward dividend yield of 4.6%.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-22

SGX Stock Analyst Report BUY MAINTAIN BUY 2.77 UP 2.660