ComfortDelGro - UOB Kay Hian 2021-05-14: Seeking To Unlock Value In Australia

COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro - Seeking To Unlock Value In Australia

ComfortDelGro reported net profit of S$56m in 1Q21 (+22% q-o-q), slightly ahead of expectations. Public transport services saw an improvement with bus charter services in the UK and Australia. ComfortDelGro also announced that it is looking to unlock value in Australia either through a partial sale of assets or an IPO.
Enhanced COVID-19 restrictions are a bump in the road but we view ComfortDelGro as a proxy for recovery in the medium term. Maintain BUY with a higher target price of S$1.95.

ComfortDelGro (SGX:C52) reported 1Q21 adjusted net profit of S$56.2m (+56% y-o-y, +22% q-o-q), which makes up 25%/28% of our/consensus’ full-year estimates. We were expecting a slightly stronger 2H21, thus the results came in slightly above expectations. On a q-o-q basis, revenue was down slightly (-3% q-o-q) while operating margin improved to 9.5%. (+1.3ppt q-o-q).

Note that the group also announced that it is exploring various options to unlock value of its assets in Australia, where it is one of the largest privately owned bus operators. It operates in Sydney, New South Wales, Melbourne and the Northern Territory. The value unlocking exercise could take a variety of forms, including a partial sale of assets or an IPO. ComfortDelGro’s total investment in Australia is S$1.17b to date.

1Q21 revenue was resilient at S$666m (+1% y-o-y, -5% q-o-q) while operating profits was robust (+32% y-o-y, +24% q-o-q), aided by government relief and improvement in charter services in Australia and the UK. While domestic travel could continue to improve the overseas private buses operations, management expects a more sizeable boost in the UK if international travel returns.

ComfortDelGro noted that ridership levels are at 65-70% of pre-COVID-19 levels in 1Q21, flat on a q-o-q basis. Additional COVID-19 measures have been put in place from 8-30 May 21, with the proportion of employees returning to workplace reduced to 50% (down from 75%). This will likely affect rail ridership revenue though we opine that a quick recovery will occur if the measures are short-lived.
A potential change to the financing framework of the Downtown Line would also aid profitability for domestic public transport segment.

Taxi revenue was relatively stable (-6% y-o-y, +4% q-o-q) even with the lower fleet size. The group has a larger number of hybrid vehicles in its fleet which improved operating margins (excluding grants) to 11.7% (+3.3ppt q-o-q). Current discount on taxi rentals will last till Jun 21, although prolonged COVID-19 measures could increase the risk of discounts being extended.

ComfortDelGro has accumulated several investments in Australia in the recent years. We note that on a blended basis, the multiple of these acquisitions is approximately 8x EV/EBITDA. Transit Systems Group, an Australian bus operator was also acquired by Sealink Travel Group in 4Q19 at 8.2x EV/EBITDA.
A sensitivity analysis of a change in ComfortDelGro’s Australia valuation has been detailed in our estimated SOTP-based valuation.

To account for a faster-than-expected improvement in overseas public transport, we raise our ComfortDelGro's earnings forecast for 2021 by 5%. 2022-23 earnings are raised marginally.

Maintain BUY on ComfortDelGro with a target price of S$1.95, pegged to 17.9x 2021F P/E (5-year mean), or its forward mean P/E, excluding outliers.
Valuations still attractive. ComfortDelGro trades at -1 standard deviation to its mean P/E and -2SD to its mean P/B of 2.0x. At 2x 2021F book value, ComfortDelGro would be priced at approximately S$2.50/share.
See

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-14

SGX Stock Analyst Report BUY MAINTAIN BUY 1.95 UP 1.850