ComfortDelGro - DBS Research 2020-11-13: Getting Out, Slowly But Surely

COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro - Getting Out, Slowly But Surely

ComfortDelGro's 3Q20 recorded sequential improvement as expected; net profit at S$21.7m a reversal from S$42m loss in 2Q
China operations leads in recovery, with Singapore following; UK/ Ireland remains challenging
Expect recovery to continue sequentially into 4Q and 2021
Worst is behind us, and with valuations unjustifiably low, there is limited downside. Maintain BUY on ComfortDelGro.

ComfortDelGro (SGX:C52)’s 3Q20 business update shows operations have passed its worst point vs 2Q20, and improved q-o-q. 3Q20 revenue was at S$816.5m, down by 16.3% y-o-y from 3Q19, but recorded a marked 22.9% q-o-q improvement.
Additionally, 3Q20 Profit after Tax/MI (PATMI) stood at S$21.7m, -69% y-o-y, but was a turnaround from 2Q20 loss of S$42m.

Amongst the key countries that ComfortDelGro operates in – Singapore, China, Australia and the UK/ Ireland, operating performances are contingent on the respective countries COVID infection situation.
While its China operations were the first to be impacted back in February, recovery has been steady and operations are largely out of the woods, hopefully providing indications to how the path would be for its other areas of operations in our view. This can be seen with its China fleet hire-out rate at > 90%, while its bus station operations in Guangzhou saw revenue improved to S$4.5m or 36% q-o-q from 2Q20. As a result, operating profit from China (bus station and taxi business) has recovered q-o-q to S$10.4m in 3Q20, from loss of S$8.6m in 2Q20, and is flat from 3Q19.

As Singapore brings its COVID-19 infection rates under control, we are seeing a gradual resumption of activities. Accordingly, public transport ridership is on the mend, and ridership of rail, bus and taxi have recovered to c.55%/ 70%/ 80% of pre-COVID levels.
ComfortDelGro's operating results are being supported by government reliefs, particularly the Jobs Support Scheme (JSS) which has been extended to August 2021, with subsidy of up to 30% for the transport sector. As the reliefs taper off in 2021, we expect this to be mitigated by pick up in activities and hence ridership. In the near term, the move towards Phase 3 of reopening in Singapore could provide more optimism.

With the UK moving into a second lockdown from 5 Nov to 2 Dec 2020, impact on ComfortDelGro's UK operations seems to be the most severe among its key countries. While public bus services are at 100% of normal levels in London, this could be reviewed by Transport for London (TfL). Management did indicate that while it is watchful of Brexit talks and funding of TfL, the belief is that public transport is an essential service for a global city. We believe that the risk to ComfortDelGro being deeply affected seems remote at this juncture.

ComfortDelGro's 3Q20 revenue from Public Transport was 11.8% lower y-o-y at S$640.8m, but an improvement from the slump to S$571m in 2Q20. The uptick was helped by improvement in Singapore rail ridership (~55% of January levels), and full bus service schedules in the UK which resumed from August. The segment was however impacted by an impairment of S$4.5m, but with S$30.1m in government reliefs, operating profit for the quarter was at S$33.6m, a 43% dip y-o-y, but similar to 1Q20.
Given the gradual resumption in activities in Singapore, we expect ridership to improve as we pin for Phase 3 recovery in the coming days. The Singapore authorities have signalled that we could see Phase 3 before the end of 2020.

ComfortDelGro's Taxi segment continues to post operating losses (-S$10.8m), with 3Q20 revenues at S$109m (-31% y-o-y). While still in the red, this is a marked improvement from 2Q20 loss of S$70.8m. An impairment of S$13m arising from the UK taxi business was recognized, though much lower than S$22.8m taken in 2Q20 for its Singapore, Vietnam and Australia taxi operations.
Taxi idle rate remains stable, rental reliefs progressively scaled back. In Singapore, management shared that its idle rate remains at single digit, while fleet size stood at under c.9,800, based on LTA data. As per our earlier reports, rental reliefs continue to be extended, though this has been progressively scaled back to 25% till end Nov (including S$10/day rental rebate by the government). ComfortDelGro has committed to at least match the reliefs extended by the government, which will last till March 2021.

Along with the gradual improvement in taxi segment, ComfortDelGro's Automotive Engineering segment also saw q-o-q improvement, with operating profit at S$4.4m, -26.7% y-o-y/ +110% q-o-q. Inspection and Testing segment also saw sequential improvement, though the slow recovery in activity for non-vehicle testing weighed down on its y-o-y performance.

The driving centre is ComfortDelGro's only segment which saw 3Q20 profits resuming back to normal levels. This possibly could be due to the backlog that was built up during the Circuit Breaker period in Singapore. On the other hand, its car leasing and rental was impacted by lower rental and discounts.

We retain our forecasts and target price of S$1.96 for ComfortDelGro, based on 1.6x FY21F PB.
While outlook remains challenging and operating performance seems far from pre-COVID levels, we adopt the stance that we saw the worst in 2Q20 at the height of lockdowns. With valuations at -2SD below its historical average on a PB basis, we believe upside outweighs downside.
See ComfortDelGro Share Price; ComfortDelGro Target Price; ComfortDelGro Analyst Reports; ComfortDelGro Dividend History; ComfortDelGro Announcements; ComfortDelGro Latest News.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2020-11-13

SGX Stock Analyst Report BUY MAINTAIN BUY 1.960 SAME 1.960