ComfortDelGro - DBS Research 2019-05-15: Shifting Gears To Take A Pause

COMFORTDELGRO CORPORATION LTD (SGX:C52) | SGinvestors.io COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro - Shifting Gears To Take A Pause

  • Downgrade to HOLD, growth is not sufficient to warrant further strong ComfortDelGro share price outperformance.
  • ComfortDelGro's 1Q19 net profit up 6% y-o-y, in line with expectations.
  • Expect steady earnings growth of 4%/3% in FY19F/20F.
  • Taxi remains weak and not improving as envisaged.



Downgrade to HOLD, prefer lower entry price.

  • We downgrade our recommendation on COMFORTDELGRO CORPORATION LTD (SGX:C52) to HOLD with Target Price of S$2.59.
  • ComfortDelGro's share price has done well YTD, but we see limited upside at this juncture.
  • Earnings growth remains, as seen in 1Q19, in line with our earlier thesis. We are projecting earnings growth of 4%/ 3% in FY19F/ 20F, and do not envisage major earnings upgrade to justify a further re-rating.
  • ComfortDelGro is currently trading at 17.6x/ 17.1x PE on FY19F/ 20F EPS, which is around its 5-year historical mean. While we like the counter for its defensive traits and consistent performance, we would advocate to enter at a lower price ( ~$2.40).


Where We Differ: In the minority camp.

  • We have shifted gears to a neutral view given the good run in ComfortDelGro's share price YTD, however one of our key thesis of taxi recovery is not playing out as expected.


Potential Catalysts: Regulatory changes could aid its taxi operations.

  • A reversal and expansion in taxi fleet, and/or changes in ride hailing/ taxi industry dynamics could aid in upgrades. 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.


Valuation:

  • Our target price at S$ 2.59, is based on average of discounted cash flow (DCF) and price-earnings ratio (PE) valuation methods. This implies 17.7x PE, which equates to its 5-year historical average PE.


Key Risks to Our View:

  • Heightened 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.
  • Upside risks could arise from acquisitions.


WHAT’S NEW - ComfortDelGro's 1Q19 results within expectations, though insufficient to raise forecasts


Downgrade to HOLD, prefer lower entry price vs Target Price of S$2.59.

  • After a stellar share price increase of c.22% YTD (outperforming STI by 15%), we see limited upside on a fundamental basis for ComfortDelGro. See ComfortDelGro's share price.
  • We downgrade our recommendation to HOLD with Target Price of S$2.59.
  • Our BUY thesis previously was on reversion to growth arising from:
    1. bottoming out in taxi fleet contraction in Singapore;
    2. earnings contribution from acquisitions;
    3. fares increase.
  • The latter two factors have played out, but industry data suggests our expectations on its taxi operations is not.

Trading at average PE with 4%/3% growth.

  • We are projecting earnings growth of 4%/ 3% for FY19F/ 20F. At current point in time, we do not envisage major earnings upgrade to justify a further re-rating.
  • Valuations are currently at 17.6x/ 17.1x PE on FY19F/ 20F EPS, which is around its 5-year historical mean, and believe these are fair at this juncture. While we like ComfortDelGro for its defensive traits and consistent performance, we would advocate to enter at lower price points (possibly ~$2.40).


1Q19 earnings up 6%, but no reasons to raise forecasts further


1Q19 in line; tracking full year forecasts.

  • ComfortDelGro’s 1Q19 net profit (after minority interests) grew by 6% y-o-y to S$70.4m on the back of 7.8% y-o-y increase in revenue to S$947m. This is an affirmation to our earlier thesis of earnings growth to continue into FY19F, though not at the same rate as 4Q18’s 40% surge. The performance, as per previous quarter, was led by contribution of its Public Transport Services Business, as well as new acquisitions.
  • Group revenue in 1Q19 driven by new acquisitions and Public Transport segment. For the quarter, Group revenue increased by a relatively robust 7.8% y-o-y or S$68.5m, which was contributed by its existing business (S$30.9m, S$13.8 net of FX) and new acquisitions (S$55m, S$54.7m net of FX), offset by FX translation impact of S$17.4m.
  • The increase in Public Transport segments (+S$71.4m or 11.6%), was driven by higher mileage operated from the commencement of the Seletar and Bukit Merah Bus Packages (March 2018 and November 2018, respectively), higher rail ridership, and fares. These were partially offset by declines in Taxi (-S$6.7m) and Bus Station (-S$0.9m).

Operating margins improved slightly to 11.3%; operating profit rose by 12%.

  • Acquisitions contributed to about half of ComfortDelGro’s operating profit growth in 1Q19. Group operating margins improved marginally to 11.3%, from 10.9% a year ago. The improvement arose largely from Public Transport segment, which we believe was from the contribution of new bus contracts in Singapore (Seletar and Bukit Merah packages) as well as acquisitions. Public Transport segment margins reached 8% vs 6.9% in 1Q18.
  • Group operating costs rose by 7.3% y-o-y, a tad lower than topline, resulting in a 12.2% y-o-y increase in operating profit to S$839.9m. This was negated partially by higher finance costs and taxes, resulting in net profit (after minority interests) growth of 6.2%.

New acquisitions contributed S$55m revenue and S$5.5m operating profit in 1Q19.

  • This implies an operating margin of 10%. Management disclosed that there were some associated one-off costs such as legal fees, booked in the quarter, and margins should improve in the coming quarters. This should aid in the continued performance of the segment.

Public Transport remains as key growth driver.

  • As per previous quarters, this segment continues to be the main contributor to ComfortDelGro's operating profit, accounting for 51% of total. Segment revenue grew by 11.6% y-o-y to S$684.6m (+S$71.4m), of which S$21.1m (+3.4%) was from existing business, with the remaining S$50.3m from acquisitions.

Rail ridership growth continues, still incurring losses but lower compared to year ago.

  • Ridership for its rail line continued to improve with Downtown Line (DTL)’s average ridership up by 10% to 476,000/day. At its more matured line, North-East Line (NEL), ridership reached 603,000/day, an improvement of 3.3% y-o-y. We understand the rail operations continue to incur losses, but this was smaller compared to a year ago, helped by higher fares and ridership.

Taxi segment continues to trend down.

  • Taxi revenue dropped by 3.8% y-o-y to S$171.9m on the back of smaller fleet size in Singapore and Australia, and decrease in revenue in China. China was impacted by a lower number of double shift taxis in Beijing and smaller fleet in Nanjing but offset by higher revenue in Shenyang.

Singapore taxi fleet shows minor contraction; original thesis of improvement not playing out.

  • One of our key thesis in our previous recommendation was the bottoming out of its Singapore taxi fleet after the steep decline from early 2017 through to early 2018. Thereafter, in mid-2018, we noted some stabilisation and a slight uptick in total fleet, which injected optimism for us. That said, we have recently noted some marginal downward drift in fleet, which stood at 11,982 (as of Mar 2019, according to official LTA statistics).

Looking towards maintaining taxi revenue in Singapore.

  • Management shared that its idle rate stood at around 3.7% (as of March) and are guarded with respect to aggressively expanding its fleet, given uncertain competition landscape and moves from ride hailing companies. However, management did indicate that they are working towards maintaining revenue contribution from Singapore taxi operations, on expectations that a lower fleet size could be offset by higher rentals on the back of fleet renewals.


Outlook & Forecasts


Maintain forecasts, growth at 4% for FY19F.

  • We maintain our forecasts and are projecting earnings growth of 4%/ 3% for FY19F/ 20F for ComfortDelGro. We dial back on our assumptions on taxi contribution, and this is offset by contribution from acquisitions.
  • Looking ahead into ensuing quarters, we expect management to deliver steady earnings growth as per its past trends. This will be led by
    1. contribution from its acquisitions as well as extracting cost synergies;
    2. higher ridership and lower losses from its rail operations;
    3. improved contribution from its Singapore bus operations.
  • However, this should be partially negated by weaker contribution from its taxi business.
  • Downgrade to HOLD, prefer lower entry price vs Target Price of S$2.59.


Risks.

  • Downside risks could come from heightened 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.
  • On the other hand, upside risks could arise from acquisitions as well as pending outcome of harmonisation of taxi and private hire vehicles regulations, which may be positive for taxi operators.





Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2019-05-15
SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.59 UP 2.570



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