COMFORTDELGRO CORPORATION LTD (SGX:C52)
ComfortDelGro - Getting Close To Fair Value; TAKE PROFIT
- TAKE PROFIT, SGD2.65 Target Price, 2% upside with 4% FY19F yield.
- We remain positive on ComfortDelGro’s growth in the public transportation business, profit contributions from new acquisitions and likely improvement in taxi earnings amidst a lack of competition from ride-hailing players. However, after delivering +21% YTD returns, ComfortDelGro – now trading at 17.3x 2019 P/E (5- year average of 15.4x) – seems fairly priced.
- Investors could consider buying ComfortDelGro again, if the share price drops below SGD2.50.
- Additional earnings-accretive acquisitions offer upside risks.
Continue to like earnings growth from public transport business.
- Despite continued losses at its rail business, we believe COMFORTDELGRO CORPORATION LTD (SGX:C52)’s public transport business will continue to be the key growth driver in the near term – thanks to organic growth in Singapore and contributions from acquisitions undertaken in Australia. ComfortDelGro’s public transport business accounts for 70% of revenue and 40% of EBIT.
- While EBIT margins have been on a decline in Australia, ComfortDelGro highlighted that new acquisitions offer margins that are higher than the group’s consolidated EBIT margins of 12-13%.
- With negligible downside risk for its bus business in Singapore, the reduction in losses from its rail business could support higher earnings growth over the next 2-3 years.
Renewal of fleet should support recovery in taxi business.
- ComfortDelGro is looking to replace older diesel taxis with new hybrid ones, which fetch a higher average daily rental rate (c.SGD120) vs the taxis that are being phased out. This, we believe, should translate into improved taxi earnings – assuming no sharp rise in competition from ride-hailing players.
- Although Gojek has intensified efforts to gain market share and is offering higher incentives to drivers and discounts to passengers, we do not expect it to have a material impact on ComfortDelGro’s taxi business.
Ample debt head room provides more inorganic growth opportunities.
- Strong operating cash flow generation has enabled ComfortDelGro to maintain a net cash balance sheet. However, management suggested that it would be comfortable with a net gearing of 30%, if it had to undertake a large earnings-accretive acquisition. At 30% net gearing, ComfortDelGro could get access to additional SGD780m of funding. This compares with SGD479m worth of acquisitions it undertook in 2018
Stock price seems fairly priced, upside risk exists.
- We deem it difficult for ComfortDelGro to continue outperforming the STI, as the stock is trading above +1SD from its 5-year mean P/E of 15.4x. While its dividend yield of 4% is still above the 10-year bond yield of 2.1%, it has fallen a tad below the STI’s 4.1% dividend yield.
- While we moderate 2019-2021 earnings estimates to account for slower improvement in taxi earnings, we maintain that earnings-accretive acquisitions and higher-than-estimated improvements in its taxi business offer near-term upside risks.
Shekhar Jaiswal
RHB Securities Research
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https://www.rhbinvest.com.sg/
2019-04-03
SGX Stock
Analyst Report
2.650
SAME
2.650
