ComfortDelGro - Phillip Securities 2019-07-12: Expanding Footprint & Digging Heels In

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

ComfortDelGro - Expanding Footprint & Digging Heels In

  • Earnings to be underpinned by the improvement in Public Transport Services segment and growth overseas.
  • Taxi segment is turning around from stricter regulations on private drivers, renewal into a more cost competitive vehicle fleet and a more dynamic fare model.
  • Maintain ACCUMULATE with a higher target price of $2.99.



Background

  • COMFORTDELGRO CORPORATION LTD (SGX:C52) is a global multi-modal land transport operator. Its major business segments include Public transport services, Taxi, Automotive engineering and Inspection and testing.
  • ComfortDelGro operates across seven countries with contributions to operating profit coming from Singapore (59%), Australia (16%), UK/Ireland (21%) and China (4%). Vietnam and Malaysia do not contribute materially.
  • ComfortDelGro's 75%-owned listed subsidiary, SBS TRANSIT LTD (SGX:S61), operates Public transport services in Singapore of Rail and Buses. Its 67%-owned listed subsidiary, VICOM LTD (SGX:V01), provides inspection and testing services.


Investment Merits/Outlook


Stable Public Transport Services segment.

  • The bus business segment is on tendered contracts without ridership risk or fare-revenue risk. Singapore bus operations will record the full year effect from the Bukit Merah tender that commenced 4Q18.
  • The rail segment is expected to improve as losses for Downtown Line (DTL) continue to narrow since the commencement of DTL3 service in October 2017. However, some margin pressure is expected for North East Line, due to higher maintenance expenses for the renewal of the line.

Seeking growth abroad.

  • ComfortDelGro has been in the Australia market as a private bus operator since 2005. In 2018 they expanded their footprint through the acquisition of four bus operators. The credibility and track record that ComfortDelGro has built in Australia gives them an advantage in bidding for bus routes and an incumbent advantage in securing renewal of existing routes.
  • Opportunities to expand into new territories (Perth and Adelaide) exist, which ComfortDelGro intends to pursue.

Fighting back in the Taxi business segment.

  • Taxi booking fulfilment was up 7.4%/11% in FY2018/1Q19 and daily average excess booking demand during peak hours stand in the thousands. This is encouraging for the Taxi segment in Singapore.
  • Initiatives like dynamic pricing through ComfortRIDE (currently in testing phase) addresses existing taxi drivers’ concerns of missing out on higher fares during peak hours as well as help ComfortDelGro to capitalise on the excess demand from the booking platform. This will help remove one possible incentive of switching to driving as a private hire under Grab or GoJek as taxi drivers can now benefit from both street hail as well as enjoy fares that are more competitive during peak periods. This initiative will likely benefit ComfortDelGro in terms of retaining their existing drivers and capturing commissions from private drivers using ComfortRIDE.
  • Another initiative is the renewal of the current taxi fleet with hybrid vehicles that are cheaper and more fuel efficient for drivers.


Recommendation

  • Maintain ACCUMULATE and raise our DCF FCFF derived target price to $2.99.
  • We lowered our WACC by 67bps to 7.63% to reflect the lower interest rate environment and de-risking of the taxi business owing to more favourable government policies. We also raise our growth rate from 1% to 1.5% to reflect our higher growth expectations.
  • Our target price is an implied FY19e forward dividend yield 4.3% and a forward P/E multiple of 17.5 times.





Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2019-07-12
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 2.99 UP 2.720



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