ComfortDelGro - DBS Research 2020-02-17: Making A Quick U-Turn On Our Ride


ComfortDelGro - Making A Quick U-Turn On Our Ride

  • Making a U-turn on our ride; Impairment and cut in final dividend threw us off course.
  • 4Q19/ FY19 headline results below on impairment, but core profit was within expectations.
  • Lower dividends may continue into FY20F; impairment on taxi segment a downer; downgrade our rating back to HOLD.

Impairment and dividend cut were a surprise

Making a U-turn on our ride; Impairment and cut in final dividend threw us off course.

  • Alas, after serious consideration, we are tuning our recommendation back down to HOLD from BUY. While the impact from the novel coronavirus (Covid-19) outbreak and recently announced taxi rental rebates were within expectations, the impairment on its taxi operations and dividend cut has led us to re-evaluate our earlier thesis.
  • We have trimmed our ComfortDelGro (SGX:C52)'s FY20F/21F earnings by 6%/5% and now expect DPS to trail lower in FY20F. Thus, we are making a tough decision to downgrade our recommendation with a lower Target Price. We are making a quick U-turn on this foolhardy ride (See report: ComfortDelGro - DBS Research 2020-02-05: Riding Against The Bug; Contrarian Or Foolhardy?), which now seems regrettable.

4Q19/ FY19 headline results below on impairment, but core profit was within expectations.

  • ComfortDelGro reported a weak performance in 4Q19. Headline net profit for the quarter was S$48.8m, down c.42% y-o-y, mainly due to a S$27.3m impairment relating to its Taxi business. Excluding the impairment, net profit for 4Q19 would have been c.S$76.1m, within our expectations. As a result of the impairment, FY19 net profit came in at S$265.1m, down by 12.6% y-o-y.

Final dividend cut a surprise.

  • A final DPS of 5.39 Scts was proposed, which was below our expectations. Including the interim DPS of 4.5 Scts, DPS for the year totaled 9.79 Scts, lower than FY18’s 10.5 Scts. See ComfortDelGro Dividend History.
  • FY19 dividend payout ratio was 80%, vs FY18’s 75%. However, excluding the impairment provision of S$27.3m, the payout ratio would have been about 72.5%.

Group revenue driven by new acquisitions and Public Transport.

  • While FY19 revenue grew 2.6% y-o-y to S$3.9bn, 4Q19 was somewhat weaker. Group revenue for 4Q19 was at S$998.6m, down by 1.8% y-o-y, arising from weaker Taxi, Automotive Engineering and Inspecting & Testing contributions. This was partially mitigated by Public Transport which posted a marginal topline growth.
  • Revenue growth in FY19 was also partially negated by FX translation loss amounting to S$73.7m, arising from weaker AUD, GBP and RMB.

4Q19 operating profit slumped by 30% y-o-y to S$84.5m, largely arising from impairment.

  • The Group’s operating profit in 4Q19 slumped by 29.7% y-o-y, which was larger than anticipated. This came about from higher depreciation and amortisation charges (+34.2% y-o-y to S$135.9m) and was also dragged by an impairment relating to its Taxi segment.

Public Transport segment accounts for bulk of Group operating profit.

  • The segment continues to be the main contributor, accounting for c.54% of Group operating profit compared to 49.3% in FY18. In 4Q19, segment revenue improved marginally by 0.6% y-o-y to S$744.3m but operating profit slipped to S$47m (-24.7% y-o-y). We believe this arose from the licence charge on its Downtown MRT line, higher repair and maintenance, weaker overseas contribution as well as FX translation effects.

Taxi operations hit by impairment.

  • In 4Q19, taxi revenue continued its decline and registered a 6.3% y-o-y drop to S$167.7 largely arising from lower fleet in Singapore, which stood at around 11,100 as of Nov (based on LTA data). This was down by 10% from Dec 2018, where its fleet size was 12,360. Operating profit from Taxi segment took a larger hit, slumping by 44%% y-o-y/ 31% q-o-q to S$18.9m. This came about from a S$27.3m impairment taken on its taxi business.

Impairment of S$27.3m relating to Taxi segment.

Valuation and forecasts

Impact of Covid-19, factoring in rental rebates.

  • In view of the outbreak of novel coronavirus 2019 (Covid-19), ComfortDelGro has announced that, along with the Singapore Government, it will co-fund and extend $20/day rental rebate per day per taxi for three months to support taxi hirers. This amounts to about S$1,800 per taxi for the duration, with ComfortDelGro bearing half the costs.
  • ComfortDelGro has indicated that the cost would be about S$9m for its fleet of about 10,000 taxis in Singapore. The amount was within our earlier estimate, though we did not factor that into our forecast.

Trimmed earnings by 6.2%/ 4.8% for FY20F/ 21F.

  • We have trimmed our FY20F/ FY21F earnings by 6.2%/ 4.8%. Our FY20F downward adjustment arises from rental rebates as well as higher interest expenses due to its net debt position. In addition, we also lowered our rental assumptions for its taxi operations and penciled in a lower operating fleet in FY21F, versus our previous expectations.

Lower dividends may continue into FY20F; impairment on taxi segment a downer; downgrade our rating back to HOLD.

  • Given our lower earnings forecasts and drawing from its lower proposed final DPS for FY19, we believe DPS could trend lower in FY20F before reverting up in FY21F. We now project FY20F DPS to trend lower to 9.6Scts (vs 10.65 Scts previously), implying a yield of 4.4% at current price. In addition, the impairment on its taxis suggest that we may have been overly zealous on the growth prospects of its taxi operations.
  • Our Target Price is revised down based on the average valuation of 15x FY20F PE and DCF (WACC 8.7%, t=0%). With limited upside, we make a U-turn on our earlier thesis and downgrade the stock back to HOLD. This was a regrettable foolhardy ride.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2020-02-17
SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.26 DOWN 2.450