ComfortDelGro - DBS Research 2020-05-26: Ridership Subdued Post Lockdown

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COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro - Ridership Subdued Post Lockdown

• ComfortDelGro's 1Q20 net profit tumbled by almost 50% on weak taxi, public transport and engineering services.
• Expect 2Q earnings to deteriorate further on lockdowns in more cities/areas that the group operates in.
• Continued social distancing and WFH arrangements could limit daily commute and hence recovery.
• FY20-21F earnings cut by 19%/ 2%; Maintain HOLD.

Public transport contracts not immune to COVID-19

Ridership recovery likely gradual post-lockdown; Maintain HOLD.

• While there seems to be increasing optimism as the world comes out of a lockdown, we believe recovery could be gradual. With calls for continued social distancing and work from home (WFH) arrangements, this may limit the improvement in daily commutes. The next few months would still be challenging for ComfortDelGro (SGX:C52) particularly its taxi operations as well as subdued public transport services.

Cut FY20F earnings by 19%, on higher taxi rental waivers, reduction in taxi fleet and lower ridership, offset by JSS.

• Post our last earnings revision report: ComfortDelGro - DBS Research 2020-03-31: Further Rebates To Push Taxi Into The Red, a lot has changed with the spread of COVID-19 across the world. We have trimmed our ComfortDelGro's FY20/21F earnings by 19%/ 2% on the back of higher taxi rental reliefs, lower fleet, rail ridership and bus services, offset partially by government reliefs particularly from Singapore’s Jobs Support Scheme.

Near term downside pressure due to exit from MSCI.

• ComfortDelGro is slated to be excluded from MSCI Singapore Index from 29 May 2020, along with three other counters – SATS (SGX:S58), SPH (SGX:T39) and Sembcorp Industries (SGX:U96). While the announcement was made on 13 May and has led to some share price weakness, the impending exit could still put pressure on the stock as index-based funds reduce their exposure on the counter in the near term.

ComfortDelGro's 1Q20 business update

1Q20 shows early impact of COVID-19; net profit dives 48.9% y-o-y.

• ComfortDelGro's 1Q20 net profit was below expectations, reflecting the early impact of COVID-19 as the pandemic spreads across the globe. While contraction in taxi operations and China operations were largely expected, the drop in public transport was larger than we had envisaged.
• Profit after tax and minority interests (PATMI) slumped by 48.9% y-o-y to S$36m, while revenue slipped 9% y-o-y to S$862.4m.

Group revenue is lowest quarterly revenue since 1Q12.

• We expect revenue to slip further in 2Q20F given the tighter measures, especially across the geographical areas/ cities the Group operates in. In 1Q20, revenue was lower in most operating segments, save for Driving Centre and Car Leasing.

Slide in Public Transport profit larger than expected.

• Public transport segment revenue was 4.2% lower at S$656.3m, impacted by lower fuel indexation in Singapore, impact from UK operations due to adverse weather and weaker tourism on its coach services, as well as weaker AUD. Operating costs, while marginally lower, only helped to partially cushion the drop in topline. As such, operating margin slipped to 5.1% (1Q19: 8%) and operating profit was 38.8% lower at S$33.6m (vs 1Q19: S$54.9m).

Ridership impacted; bus contract revenue lower on fuel indexation and fewer services.

• We note that ridership in Singapore has dropped drastically by 70-75% during the Circuit Breaker period (April and May), and that public bus frequency in the UK has reduced to weekend levels. While bus contracts are locked in, there is some variability in topline depending on total bus services operated. As such, with lower ridership, we expect 2Q20 earnings contribution from this segment to further deteriorate, before a gradual recovery thereafter.
• That said, a recovery is dependent on the total daily commutes which would be affected given continued calls for social distancing and WFH arrangements.

Taxi impacted by China and early rental rebates; losses expected in 2Q20.

• Taxi segment saw revenues slump to S$127.8m, down 25.7% y-o-y, arising from a smaller fleet in Singapore, rental reliefs scheme from Feb and impact from China taxis due to lockdowns. As a result, operating margin slipped to 1.9% from 16.4% a year earlier, ending the quarter with an operating profit of S$2.4m.
• With more extensive rental reliefs and full rental waivers granted for its Singapore fleet in April and May 2020, we expect 2Q20 to be the worst quarter for this segment. ComfortDelGro has earlier indicated that total rental waivers and relief schemes in Singapore could cost the Group about S$116m.

Post Circuit Breaker, rental waiver to last till September.

• At the current juncture, through the numerous measures announced, the Group has indicated that taxi rental relief of S$46.50 (of which $10 is funded by the Singapore government) will last till September 2020 even after the Circuit Breaker extension ends (due to end on 1 June 2020). However, with restrictions still largely in place and full normal activities yet to resume, we would not be surprised by additional reliefs given to support its taxi drivers. While this could create near term financial pain, this would help to build loyalty and commitment from its taxi hirers.

Automotive engineering affected by lower taxi fleet.

• Revenue for the segment was 22.3% lower y-o-y to S$50.2m, mainly due to a smaller taxi fleet in Singapore. Margins also softened to 11.2%, from 13.5% a year earlier on lower business volumes. As per the other segments, 2Q20 would likely see lower volumes given the impact from partial closures of its operations during the Circuit Breaker period in Singapore.

2Q20 earnings to decline further.

• With further lockdowns and measures in the months of April and May, it will be no surprise that its operations will be further hit in 2Q20.
• Although a few business activities are still operating (Automotive Engineering, Inspection & Testing Services, Car Leasing), some are considered as non-essential services (e.g. Driving Centre), leading to reduced level of activities overall.
• Furthermore, while its bus station in China has recommenced operations in 2Q20, it was noted that activities were lower due to ongoing restrictions.

Valuations and forecasts

Cut FY20/21F earnings by 19%/ 2%.

• We trimmed our ComfortDelGro's forecasts by 19%/ 2% on:
  • taxi rental waivers provided during the Circuit Breaker period in Singapore from 7 April and to 1 June 2020;
  • lower rail ridership and bus services provision,
• offset partially by Jobs Support Scheme and government incentives provided.
• We have also trimmed our expectations of dividend on the back of lower profits.

Maintain HOLD, Target Price: S$1.50.

• We maintain our HOLD recommendation on the counter. We expect earnings to slump by > 30% in FY20F on the back of the impact from COVID-19 on its operations.
• ComfortDelGro's share price has corrected by 35% YTD and could have priced in the negatives. The counter is trading at 18.3x/13.3x FY20F/ 21F PE.
• See ComfortDelGro Share Price; ComfortDelGro Target Price; ComfortDelGro Analyst Reports; ComfortDelGro Dividend History; ComfortDelGro Announcements; ComfortDelGro Latest News.
• Whilst there seems to be optimism as the world emerges from lockdown, we expect the next few months would still be challenging for ComfortDelGro given the continued calls for social distancing and WFH arrangements. These would limit daily commute, putting pressure on ridership.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2020-05-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.50 DOWN 1.550