ComfortDelGro - DBS Research 2019-11-14: Set For A Subdued Ride Ahead


ComfortDelGro - Set For A Subdued Ride Ahead

  • ComfortDelGro's 3Q19 earnings underwhelm with 11% y-o-y decline.
  • Fixed charge for Downtown Line recognised, taxiearnings continues to fall.
  • Dialed back forecast by 7% on lower taxi fleet andfixed charge costs, mitigated partially by fare increase.
  • Key share price catalysts are acquisitions, stabilisation oftaxi fleet; Maintain HOLD, Target Price lowered to S$2.48.

Lowered Target Price to S$2.48, maintain HOLD for 4.5% yield.

  • We maintain our HOLD recommendation on COMFORTDELGRO (SGX:C52) with a lower Target Price of S$2.48.
  • We trimmed FY19F-20F earnings by 7% each year and now expect outlook to remain subdued with 3%/1% earnings growth in FY20F/ 21F. This is on the back of its weak taxi operations, coupled with higher costs at its rail operations.
  • 3Q19 net profit was underwhelming at S$70m (- 10.8% y-o-y) on higher opex and taxes, along with contraction in taxi revenues arising from a smaller fleet size.
  • At current price, CD is trading at 17.1x FY20F PE (c.5-year average), and ComfortDelGro Share Price should be supported by its 4.5% yield. See ComfortDelGro Dividend History.

3Q19 below expectations on DTL fixed charge fee, taxes.

  • ComfortDelGro posted 3Q19 net profit of S$70m (-10.8% y-o-y, -7.8% q-o-q) on the back of 1.1% y-o-y growth in revenue to S$979m. This trails our expectations, and forms 68% of our original FY19F earnings (vs 75%-77% historically). See ComfortDelGro Announcements; ComfortDelGro Latest News.
  • The underwhelming performance vs expectations arose largely from higher operating expenses due to a fixed charge fee on its rail operations, coupled with higher tax rates as a result of higher contribution from Australia and continued contraction in its taxi fleet size.
  • We trimmed our earnings forecasts for FY19-20F by c.7% for each year, and accordingly lowered our Target Price to S$2.48.

Group revenue driven by new acquisitions and Public Transport segment in Singapore.

  • The growth in revenue was driven mainly by contribution from its Public Transport segment in Singapore and new acquisitions (S$33.7m,
  • S$32.1m net of FX). As seen in 1H19, revenue growth was offset partially by FX translation impact of S$20.3m, mainly due to the weaker GBP and AUD, against SGD.

Operating profit dipped by 4% y-o-y.

  • ComfortDelGro’s operating profit declined by 4% y-o-y to S$108.9m, as operating costs increased by a tad higher (+1.8% y-o-y) than topline.
  • Of note, staff costs rose by 3.9% y-o-y (S$433.8m, +$16.1m), repairs & maintenance by 5.2% (S$78.5m, +S$3.9m) and other opex by 45.6% (S$32.9m, +S$10.3m). The latter was attributed to the recognition of fixed charge for Downtown Line (DTL). By business segment, taxi operations suffered a 18.5% y-o-y drop in operating profit to S$27.4m.

Public Transport remains as main profit contributor.

  • The segment continues to be the main contributor to Group operating profit, accounting for 55% of the total compared to 51% in the same period a year ago. Segment revenue grew by 4.9% y-o-y to S$727.1m (+S$31.5m), of which S$33.5m was from acquisitions, while revenue from existing businesses slipped by S$2m.
  • Its subsidiary, SBS Transit, saw higher revenue from its bus and rail operations on higher mileage operated and higher rail ridership and fares. This was offset by lower revenue in the UK due to lower mileage and a weaker GBP.

Rail ridership continues to grow, with possibly lower losses if not for the fixed charge recognised.

  • Ridership for its rail line continued to improve with DTL’s average ridership up by 4% to 491,000/day. Meanwhile, North-East Line (NEL)’s ridership reached 615,000/day, an improvement of 1.2% y-o-y. We believe losses would have been lower compared to a year ago given ridership growth and higher fares.
  • That said, we believe this was negated by the fixed charge incurred for DTL, which we estimate was S$11m in 3Q19. Management indicated that the charge was for the 9-month period, and while this would be recurring in ensuing quarters, 4Q19 would see a normalised figure.
  • While we were aware of the possibility of this charge, this was not penciled into our forecasts given the uncertainty of the formula and amount. In terms of its rail operations, management cautioned that costs would increase on back of higher repairs and maintenance costs.

Taxi operations continues to contract.

  • Taxi revenue dropped by 10.9% y-o-y to S$162.1m largely arising from a lower fleet in Singapore, which stood at around 11,100 as of Aug- 19 (based on LTA data). This was down by 10.3% from Dec 2018’s fleet size of 12, 360. Management indicated that idle rate remains relatively stable with utilisation at around 95%. Operating profit from Taxi segment declined by 18.5% y-o-y/ 7.7 q-o-q to S$27.4m, as margins contracted to 16.9% (from 18.5% a year ago).
  • The management disclosed that the resignation rate of taxi drivers has abated, and they continue to introduce incentives to retain drivers. This was largely similar with indications in the prior quarter.
  • Management opined that competition from private hire vehicles seems to have subsided slightly, though they warned that the situation remains fluid. Fleet renewal into hybrid taxi models (from diesel) would continue given drivers’ preference but this is somewhat hampered by constrained supply.

Outlook & Forecasts

Trimmed earnings by 7%, factoring in fixed charge, dialing back taxi fleet assumption mitigated partially by fare increase.

  • We trimmed our FY19F/20F earnings by c.7% each year on the back of
    1. factoring in higher operating expenses arising from the fixed charge payable on its DTL operations;
    2. lowering Singapore taxi average fleet assumption;
    3. offset partially by the expected 7% increase in public transport fares, effective 28 Dec 2019.

Maintain HOLD, Target Price lowered to S$2.48; earnings growth subdued but yield at 4.5%.

  • Along with our revised earnings forecasts, we lowered our PE/ DCF backed Target Price to S$2.48. We have rolled our valuations forward to average of FY19F/20F earnings. See ComfortDelGro Share Price; ComfortDelGro Target Price.
  • ComfortDelGro is currently trading at 17.6x/ 17.1x FY19F/20F PE which is around its 5-year historical average.
  • Earnings outlook at this juncture looks relatively subdued and we project earnings to grow by 3%/1% in FY20F/ 21F. Potential earnings upgrade and share price catalyst could come from acquisitions and/or reversal in its taxi fleet.
  • Balance sheet remains healthy, and despite an expected contraction in earnings in FY19F, we expect the payout ratio to be maintained at c.75%. This equates to a yield of 4.5%, which we believe should provide support to ComfortDelGro Share Price.

Where we differ: Lower range of consensus.

  • With our earnings revision, our projections are at the lower end of consensus given our muted take on taxi recovery, coupled with our expectations that fare increases would be negated by higher maintenance and other costs.

Potential Catalysts:

  • A reversal and expansion in taxi fleet, and/or changes in ride hailing/ taxi industry dynamics could lead to earnings 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.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2019-11-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.48 DOWN 2.590