ComfortDelGro - DBS Research 2020-06-01: Could Be Time To Hop On Now Rather Than Later


ComfortDelGro - Could Be Time To Hop On Now Rather Than Later

  • Upgrade to ComfortDelGro (SGX:C52) BUY, Target Price raised to S$1.68 based on 16.8x FY20F/21F earnings pegged to historical average PE.
  • Re-opening of economy, jobs support and “worst over” mentality could provide support to ComfortDelGro's share price.
  • Sell down on removal from MSCI Singapore an opportunity to accumulate.
  • Trading at 1.2x P/BV, -2 SD below historical average.

Upgrade to BUY; casting sights on recovery

  • Economy is opening; Opportunity to accumulate on weakness from MSCI removal. A faster-than-expected opening of the economy could be a share price catalyst, and we believe a “worst could be over” mentality could lead the market to cast aside worries of a “largely known” weak 2Q20 operating performance. ComfortDelGro's share price has retreated by 6.5% in the past week, after its 1Q20 business update and removal from MSCI Singapore index (on 29 May).
  • We see an opportunity to accumulate ComfortDelGro, looking towards recovery in 2H20 - albeit gradually, and picking up pace in FY21F. We project FY21F earnings to rebound by 38%.
  • Valuations attractive at -2SD P/BV/ -1SD PE. We raised our target price to S$1.68, pegged to average forward historical PE of 16.8x on average FY20F/21F earnings (from 15x previously).
  • Further upside to target price could come as we obtain better clarity in terms of pace of recovery. Based on our projections, the counter currently trades at 1.15x P/BV and 12.4x P/E on FY21F earnings, which is around -2SD and -1SD of its respective historical averages.

What has changed since 1 week ago?

  • While it is not all clear blue skies yet, we believe there is a silver lining on the dark horizon. Notably, several key events and developments had made us rethink our earlier thesis. They are:
    1. Singapore’s earlier than expected move into Phase 2 reopening;
    2. revision in rental waivers for taxi drivers and monthly review;
    3. enhanced Jobs Support Scheme for rail and point-to-point (P2P) operators;
    4. ComfortDelGro's share price correction on MSCI Singapore Index removal.

(i) Singapore could move into Phase 2 re-opening before end of June - Provide optimism.

  • We had earlier expected that the move towards the various stages could be prolonged. However, on 28 May 2020, the Singapore’s Multi-Ministerial Taskforce has indicated that a decision will be made in mid-June on whether the conditions would be right to move into Phase 2. If community spread stays stable, Singapore could be moving onto this next phase before end-June. This, in our view, is faster than we had earlier envisaged, and could provide optimism for recovery plays, including ComfortDelGro.
  • Upside to our current assumption of 30% decline in ridership. We have penciled in a full year rail ridership decline of > 30% for FY20 to an average daily ridership of 820,000 for SBS Transit (SGX:S61)’s rail operations. Average daily ridership was 1.19m in Fy19. Our estimates have factored in a gradual resumption, and there could be upside should events turn more optimistic, particularly if the ongoing re-opening phases materialise faster than expected. In addition, there has been indications that with social distancing, the current fare levels may not be sustainable. This suggests there could be a rethink on public transport fares which bodes well for SBS Transit’s rail operations. However, this may not take place in the immediate term given the current economic challenges and difficulties faced by the population due to COVID-19.

(ii) Taxi rental waiver in June a step up; lower discount in July – Sep could present upside.

  • ComfortDelGro announced further measures last Thursday, 28 May, for its taxi drivers. It will provide 50% rental waivers for its taxi drivers for the month of June. While this is a step-down from full rental waivers provided during Singapore’s CB period from 7 April till 1 June, this is better compared to the rebate of S$46.50/day (inclusive of $10/day provided by the government) announced earlier.
  • Estimated to cost ComfortDelGro c.$3m more, pushing total reliefs to an estimated $119m; builds loyalty from taxi hirers and beneficial for the longer term. We estimate that this latest measure could cost ComfortDelGro c.$3m, on top of the measures and costs announced earlier. Despite the short-term pain, the reliefs given would enhance loyalty from its taxi hirers over the longer term. Since the start of COVID-19 pandemic, the group has been proactive in offering relief measures, to the extent of pushing its operations into the red, which is the first for the group. Beyond rental rebates, it has also started tie-ups with food and beverages establishments to provide a platform to aid drivers in earnings additional income during this period.
  • Potentially lower cost of rental relief if discounts are based on lower percentage of total rental vs previous estimates. Based on measures announced, we have estimated the total costs to ComfortDelGro amounts to S$119m. With monthly reviews taking place after June, and should rental discounts be based on percentage of rental, there is a possibility of lower impact to ComfortDelGro’s overall costs. Currently, assuming the rental rebate of S$46.50/day is extended from July till September, this equates to a rental relief of c.40%. Based on our scenario analysis, if that steps down by 10% per month from June’s 50%, this could equate to c.9% lower costs to ComfortDelGro vs our current estimates.

Rental car population has declined since March, with onset of COVID-19.

  • We noted that the rental cars population has receded since March, coinciding with the onset of COVID-19. While it could be mere coincidence, we also note that a significant portion are chauffeur driven cars. As of Dec 2019, 72% of rental cars are chauffeur driven vis-à-vis 28% “self-drive”. This portion has grown at an exponential rate since 2014, along with the entry of ride hailing booking operators. With the current challenging climate brought about by COVID-19, we believe there could be significant pressure for such fleet owners.

Not surprised to see car rental companies exiting; nudging PTP/ taxi industry towards more sustainable dynamics.

  • While unfortunate, we would not be surprised should we see the rental car fleet being displaced and/or decimated, with rising bankruptcies amid current environment. Over the medium term, we believe this could swing supply and demand dynamics towards a more sustainable level. This would bode well for the survivors, particularly the larger ones.

(iii) $33bn Fortitude Budget enhances Jobs Support Scheme (JSS) for rail and PTarget Price operators.

  • In the Ministerial Statement by Deputy Prime Minister/ Finance Minister, Mr Heng Swee Kiat on 26 May 2020, it was announced that there are enhancements to the JSS, amongst other details. Of note, the JSS will be extended by an additional month to 10 months, instead of 9 months previously.
  • In addition, rail operators and Point-to-Point (P2P) transport operators would receive a higher subsidy of 50% on the first S$4,600 of gross monthly wages per local employee. This is up from 25% announced previously. We have not factored this into our estimates, but our initial estimates suggest this would improve overall JSS benefits by c.48% and aid in mitigating the fall in operating profits due to the current downturn.

(iv) Removal from MSCI Singapore

  • ComfortDelGro has been removed from MSCI Singapore Index, along with several other counters (SATS (SGX:S58), Sembcorp Industries (SGX:U96) and SPH (SGX:T39)) effective 29 May 2020. This has led to share price weakness as index-based funds would reduce exposure to these counters. We had seen a surge in volume on 29 May with 255.7m shares (total value of S$371.4m) transacted and ComfortDelGro's share price dropping by 4%. In the past week, ComfortDelGro's share price has retreated by 6.5%. While we do not rule out residual selling over the next few days, we believe near term downside could be limited, barring any significant and unforeseen negative news development.

Valuations and forecasts

2Q20 and FY20F earnings could be “water under the bridge”.

  • We maintain our forecasts at this current juncture and expect earnings to plunge by 31% in FY20F. In addition, 2Q20 net profit is likely to turn out to be ComfortDelGro’s worst quarter since its listing in 2003. However, we believe this could be already be “water under the bridge”. More importantly, in our view, is that ComfortDelGro is likely to weather this current storm and we expect earnings to rebound by 38% in FY21F. Based on our projections, the counter currently trades at 1.15x P/BV and 12.4x P/E on FY21F, which is around -2SD and -1SD of its respective historical averages.

Capitalise on economy opening up; opportunity to accumulate on weakness due to MSCI removal.

  • A faster-than-expected opening of the economy could be a share price catalyst, and we believe the “worst could be over” mentality could cause the market cast aside worries of a “largely-known” and weak 2Q20 operating performance.
  • ComfortDelGro's share price has retreated by 6.5% in the past week, after its 1Q20 business update and removal from MSCI Singapore index (on 29 May).

Upgrade to BUY, Target Price raised to S$1.68.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2020-06-01
SGX Stock Analyst Report BUY UPGRADE HOLD 1.680 UP 1.50