ComfortDelGro - DBS Research 2020-09-03: Has Market Priced In Phase 3? We Think Not

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COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro - Has Market Priced In Phase 3? We Think Not

• Has market priced in Phase 3 re-opening for ComfortDelGro? We think not, given P/B is -2SD below mean.
• Data points to people moving more; Phase 3 to see a jump.
• Keeping watch on potential P2P industry consolidation and fare review.
• Not a smooth ride for ComfortDelGro, but odds of ComfortDelGro's share price appreciation are higher.

Has market priced in a Phase 3 Singapore re-opening?

• Since the Circuit Breaker period in April and May, Singapore has gradually reopened, and is now in Phase 2 of its reopening. Is the market pricing in a Phase 3 reopening? We think not. ComfortDelGro (SGX:C52)'s valuations look very attractive at 1.2x P/B, which is at its historical trough; and, we feel this provides a key downside valuation support. The gradual re-opening of the economy with reversion to normalcy, albeit slowly, will be a catalyst for the share price.
• Mobility data indicating people are gradually on the move. Based on data from Google Mobility, as of late August, movements in residential areas are only about 17% above the median across 5 weeks in Jan/ Feb. Correspondingly, mobility movements at workplaces, retail & recreation and transit stations are 20%-30% below that prior to the outbreak of COVID-19.
• Referencing to Community Mobility data from Google, and as seen in the chart following below, there has been a gradual increase in mobility since Phase 2 re-opening on 19 June. Our read of the situation is that
  1. confidence is improving given total and community cases are on the downtrend;
  2. the public tends to heed the authorities call relatively closely, and we have seen/ should see sudden shifts in mobility movements with the announcements of each of the measures, from tightening to easing.

Phase 3 should bring a further increase in mobility figures; a catalyst for share price.

• With the continued low infection rates and potential for further easing in Singapore towards Phase 3, we could see mobility figures take a further turn up. That is, mobility figures in residential areas should drop, while that in transit, retail & recreation and workplaces should increase, as seen in Phase 2.
• Of course, work-from-home (WFH) may continue to feature, but we may see increasingly more workers returning to offices, aiding in commuting.

Taxi mileage recovering = reducing taxi rental rebates.

• Based on the latest available statistics from Land transport Authority (LTA), daily taxi mileage has improved since the Circuit Breaker period. As of June, we note that average daily mileage for 2-shift taxis stood at 153km, which is about 40% below the average of 250km mileage/ day prior to COVID. This is an improvement from the low seen during the Circuit Breaker months of April and May 2020, which saw average mileage of only 108km/ 102km per day, respectively. This was about 60% below the average.

July and August average mileage likely to have improved further.

• Latest data for July and August is not available yet at this juncture. But, based on anecdotal observations and statistics from Google mobility, we infer that mileage clocked (and implying takings as well) should have improved further from June. In fact, our expectations are that this is tracking closely to the level of rental rebates Comfort/ CityCab have been extending to its taxi drivers.
• Currently, the level of rental rebate is at 30% from 16 Aug till 15 Sep, a lower level vis-à- vis 40% given in the month of July.

Expectations for rental rebates to be reduced progressively.

• For now, we do expect rental rebates to continue to be extended beyond Sep, albeit at a lower rate, as per the trend seen in the past months. As a recap, there were full rental waivers for the months of April and May (during Circuit Breaker period), followed by step downs to 50%/ 40%/ 30% from Jun-Jul/ Jul-Aug/ Aug-Sep months.
• There is no indication on what ComfortDelGro will be providing post Sep, but we are watching out for further reduction of rental rebates as an early sign towards further improvements after this current round.

Private hire car fleet is idle; further contraction and consolidation of P2P industry on the cards?

• It is well known that in the past few years, the taxi industry (Point-to-Point or P2P) has been under threat from private hire vehicles. In Feb 2020, private rental car total population reached a high of over 77,800 vehicles, of which a majority are chauffeur driven. This is up more than 3.8x from Jan 2015, when the total private rental car fleet in Singapore was 19,000 cars.

Private rental car fleet has shown m-o-m contraction since Feb.

• Since the outbreak of COVID-19, the total private rental car fleet has also contracted alongside the same trend seen for taxis. As of July 2020, private rental car fleet size stood at 73,172, down 6% from the high in Feb 2020. According to earlier media reports, an estimated 20,000 cars are un-hired and sitting idle.
• Given the headwinds of low ridership in the past few months brought about by COVID, we expect the financial impact on car rental companies to be deep and wide, similar to the taxi industry. In the months ahead, we are keeping tabs on news and developments pertaining to closures of such companies and/or consolidation.
• Our hypothesis is that a number will fail and only the stronger companies will survive. This would therefore drive total private rental car fleet numbers down to a more sustainable level.

Upcoming fare review – a touchy topic; deferment could be offset by licence charge waiver.

• The annual Fare Review Exercise (FRE) by the Public Transport Council (PTC) is due to commence, based on prior years’ timeline. In 2019, the FRE commenced on 3 Sep 2019, with the public transport operators (PTOs) submitting their fare applications by 23 Sep 2019. The fare increases of 7% was then announced on 8 Oct, and applied from 28 Dec 2019.
• Taking a leaf out from the timeline seen in 2019, we expect the process to commence soon. For this year, given the economic backdrop, this could be a sensitive area. Based on our estimates and referencing from the fare formula, the allowable fare increase could be in the region of 2%-3%. We believe the PTOs would likely apply for the maximum allowable increase given the challenges faced on the low ridership for rail, coupled with the maintenance programme.
• Deferment of fare increase could be compensated by waiver of licence charge. We do not rule out that the PTC will seek to defer the fare increase as seen in some instances in the past. To ease the burden for the rail PTOs, the authorities could waive/ lower licence charges. In SBS Transit (SGX:S61)’s case, we understand that the fixed licence charge for Downtown MRT Line (DTL) amounts to c.S$20m for FY20F.

ComfortDelGro - Forecast & Valuation

• FY20F is turning out to be the most challenging year for ComfortDelGro, like many companies. 1H20 interim results were dismal with losses, but we expect this would have been the worst; and we are now pass that stage as indicated in our earlier note - ComfortDelGro - DBS Research 2020-08-16: Past Its Worst Rocky Stretch.
• We reiterate our BUY recommendation as we believe we have seen the worst for ComfortDelGro in its 1H20 results reported in mid-Aug. ComfortDelGro's share price has inched up since hitting a low of S$1.33 prior to its dismal but forewarned 1H20 interim results report card. Nonetheless, we continue to see higher odds of share price appreciation over the next 6 to 12 months versus downside risks, as normality returns.
• We urge investors to look beyond FY20F as life returns to a high degree of normalcy in FY21F. We raised our Target Price to S$1.96, pegged to 1.6x FY21 P/B, which is -1SD of its historical mean. Given the lack of earnings visibility during such unprecedented operating conditions, we prefer to use P/B as a valuation tool. While the Target Price implies c.18x on FY21F EPS, we expect the PE valuation to drop further as we move into FY22F (c.16x).
• See ComfortDelGro Share Price; ComfortDelGro Target Price; ComfortDelGro Analyst Reports; ComfortDelGro Dividend History; ComfortDelGro Announcements; ComfortDelGro Latest News.

Lower MRT ridership, offset by JSS extension.

• Our forecasts remain largely unchanged, as we dial back our rail ridership assumption to 288m/ 397m rides per year for FY20F/ 21F, down from 296m/ 414m rides/year, but offset by the extension of Jobs Support Scheme (JSS) to March 2021 as announced by the Deputy Prime Minister/ Finance Minister in his Ministerial Statement on 17 Aug 2020.
• We believe our rail ridership assumption is reasonable as we are currently pencilling in 2021/ 2022 ridership to be c.9%/ 4% below 2019 ridership levels.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2020-09-03

SGX Stock Analyst Report BUY MAINTAIN BUY 1.96 UP 1.630