ComfortDelGro - Maybank Kim Eng 2019-10-01: Not A Fare Price – Upgrade To BUY

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

ComfortDelGro - Not A Fare Price – Upgrade To BUY


No fare hikes implied in price?

  • COMFORTDELGRO (SGX:C52) has de-rated and underperformed the index over the past one and three months on no major unexpected news. The share price is implies a “no fare hike” scenario for Singapore public transport which we think is not justified.
  • With ComfortDelGro's share price now implying a healthy 15% upside on our unchanged DCF based (WACC 9.0%, LTG 1%) Target Price of SGD2.76, we upgrade to BUY (from HOLD).
  • Worse than expected taxi business erosion and/or no fare hikes is the downside risk to our outlook.



Writing is on the wall?

  • Aside from the Transport Minister indicating last Jul 2019 that rail operators such as ComfortDelGro may receive some form of grant (see report: ComfortDelGro - Rail Happiness?), public transport regulator PTC has indicated a potential 7% fare hike recently. We previously upgraded our forecasts for the former but not the latter. We believe it is reasonable for at least one of these events to take place in FY20 and optimistic for both and hence maintain our current forecasts.


Same concerns, same defensive shift

  • The Singapore taxi business remains under pressure from ride hailing as ComfortDelGro continues to lose fleet share every month up to Jul 2019. Furthermore, during the recent results management indicated a potential sacrifice of 2H19 taxi margins in order to win back and retain drivers. We believe these risks are largely captured in FY19E consensus estimates; we are slightly below at -3%.
  • Meanwhile, the company’s strategic shift to a more regulated return BCM type model and continued demand for public transport services will continue to mitigate and outpace such risks.
  • Every 1% change in public transport revenues raises our Target Price by a similar 1% while it would take more than twice the change in taxi revenues to generate a similar outcome.


Scenarios – from bull to worst

  • If both fare hikes occur, our target price could rise by 5% to SGD2.90.
  • Meanwhile, if both do not materialize this would reduce our Target Price by 11% to SGD2.45; i.e. not far off from current ComfortDelGro's share price levels. As such, we believe the current risk-reward is favourable.


Outlook

  • The continued decline in ComfortDelGro’s Singapore taxi fleet on both an absolute and market share basis is potentially a driver of the recent ComfortDelGro's share price weakness but it should not be unexpected; in our view. Neither is the situation as dire as the 2017 Uber competition period that saw the steepest decline in the taxi business.
  • The structural transformation towards public transport services (bus and rail) and diversification outside Singapore remains a key theme and growth driver despite taxi business pressure. Our revenue and EBIT forecasts assume this process will continue into FY20E partly due to the fare hike to be granted in FY20E. We have not factored any further fare hikes in FY21E onwards.
  • Our FY19E core profit forecasts are slightly below (-3%) consensus potentially due to more aggressive taxi EBIT deterioration assumptions. However, we are slightly above (+3%/+5%) in FY20E/21E potentially from more aggressive public transport services growth from fare hikes and improvements from existing overseas operations. We have not assumed any new overseas acquisitions.


Valuations

  • At current levels, ComfortDelGro is trading slightly above its 3-year and 10-year average P/E valuations. This is far from the above +1SD levels the stock has traded at in recent times.
  • Meanwhile, the last time the stock traded at -1SD was during the height of taxi industry value destruction during the Uber competition period. Although current competition from unlisted Grab and GoJek has continued to erode the taxi business the business restructuring has since taken place. Arguably this mitigates the risk of of a similar de-rating as seen in 2017-2018.





Luis Hilado Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-10-01
SGX Stock Analyst Report BUY UPGRADE HOLD 2.760 SAME 2.760



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