• 1Q23 revenue was within expectations but PATMI disappointed. 1Q23 revenue/PATMI was 22% and 18% of our FY23e forecast.
• The cost recovery from higher indexation of bus fees is underway in UK but the full benefit will be more evident in 2H23. Taxi earnings were hampered by incentives in China to attract taxi drivers, especially in Beijing. Balance sheet continues to strengthen with net cash of S$718mn
• The recovery in Singapore disappointed. Improvement in rail passenger volumes and prices could not offset the higher electricity and lower bus contracting fee. We are lowering our FY23e PATMI by 8% to S$164.7mn. Recovery in FY23e will stem from increased passenger volumes for both taxis and trains, a reduction in taxi rental rebates in Singapore by 5% points, indexation of UK bus contracts and lower taxi rebates in China. We maintain BUY with a reduced DCF target price of S$1.57 (prev. S$1.63).

The Positives

+ Taxi revenue improvement is still underway. Recovery of taxi revenue was due to booking commissions introduced last year (May 22: 4%, Oct 22: 5%) and a more stable taxi fleet. The improvement in taxi revenue would have been stronger but for incentives in China to attract drivers. Utilisation rate of taxis remains sluggish, especially in Beijing. Operating profit in China declined 46% to S$3.4mn.

+ With stable capex, cash piles up. Comfort generated free cash flow of around S$76.8mn in 1Q23 (1Q22: S$92.5mn). Net cash continues to pile up on the balance sheet. 1Q23 net cash is S$718mn, similar to last years S$754mn. Net cash is at record levels. Annualised capex is now S$200mn p.a., compared to the S$350mn-400mn p.a. pre-pandemic. We expect the large cash hoard will also boost earnings through higher interest income.

The Negative

- Poor margins in public transport. Public transport operating margins are a paltry 3% vs pre-pandemic 8%. Margin pressure comes from low bus contracting fees in Singapore, higher electricity and increased bus driver fees in Australia and UK. Despite the jump in rail fees (via subsidies) and volumes in Singapore, margins were under pressure. UK suffered an operating loss of S$3.5mn in 1Q23, compared to S$1.6mn profit a year ago.

• FY22 revenue met expectations at 99% of our forecast. Adjusted PATMI was 13% below due to an additional S$15mn rail electricity expense from the new contract in Singapore. Cost recovery will come from the 13.5% fare adjustment effective late December 2022.
• Special dividend of 2.46 cents was declared to mark the 20^th anniversary of the SGX listing. FY22 total special dividend was 3.87 cents while the ordinary dividend was 4.61 cents (3.8% yield).
• We lowered our FY23e PATMI by 20% to S$178.4mn as the timing of the indexation of the UK bus contract is unclear. Nevertheless, we expect earnings growth in FY23e from increased passenger volumes for both taxis and trains, re-pricing of rail fares in Singapore, indexation of UK bus contracts and reduction of taxi rebates in China. We maintain BUY with a reduced DCF target price of S$1.63 (prev. S$1.75).

The Positives

+ Taxi recovery on track. 4Q22 operating profit (excluding relief and gain on disposal) jumped 36% YoY to S$15.9mn. Earnings recovery on the back of lower rental discounts and introduction of booking commissions (May 22: 4%, Oct 22: 5%). Booking volumes in FY22 rose 31% to 34mn.

+ Piling up cash. Net cash in FY22 rose S$97mn to S$675mn. Free cashflow generated during the year was S$266mn. Gross CAPEX on vehicles was around S$300mn. FY23e CAPEX might be slightly higher for EV taxis, the PHV car rental fleet and EV charging stations. CAPEX is still below the S$400mn-500mn p.a. spent pre-pandemic.

The Negative

- China, UK and Ireland's weak operating performance. We estimate UK and Ireland suffered a S$13mn operating loss in 4Q22 due to the one-off S$9mn UK bus driver pay deal backpay agreement. China operating earnings were down 60% to S$10.3mn in FY22 due to taxi rental rebates of S$11mn.

• 3Q22 earnings were below expectations. YTD22 revenue and PATMI were 74%/50% respectively of our FY22e forecast. UK and Australia earnings disappointed due to lags in repricing higher bus fuel and wages. A performance worse than the pandemic.
• Operating profit in Singapore recovered significantly from S$1.8mn to S$46.7mn. Recovery is from the surge in rail ridership and lower taxi rental rebates plus maiden booking commissions.
• We cut our FY22e PATMI by 24% to S$207.3mn. The recovery in Singapore from the surge in rail ridership and lower taxi rebates will continue in 4Q22. However, the time lag to pass through higher labour and fuel costs in Australia and UK will place pressure on operating margins. We lowered our DCF target price from S$1.80 to S$1.75.

The Positives

+ Surge in Singapore profitability. 3Q22 operating profit in Singapore (excluding disposals/grants) recovered strongly to S$46.7mn, from $1.8mn a year ago. The turnaround was driven by a recovery in rail traffic plus lower taxi rebates. Daily ridership for SBS Transit is up 52% YoY in 3Q22. Rebound in taxi earnings is from lower rebates of 15% (3Q21: 25%) plus booking commissions of 4%.

+ Healthy free cash flows. FCF in 3Q22 improved from S$95.2mn to S$193.7mn.  Net CAPEX for the year was moderately higher at S$150.7mn (YTD21: S$136.1mn). CAPEX will not return to pre-pandemic S$400mn-500mn levels as the conversion of the fleet to hybrid and EV is almost complete. Furthermore, higher COEs negatively impact the return profile of vehicle investments.

The Negative

- Multiple bumps overseas. The combined operating profit of overseas operations (Australia, China, UK) collapsed 63% YoY to S$6.7mn. The worse performer was the UK with a S$6.5mn loss (3Q21: S$0.9mn profit). UK bus operations to pass on the higher fuel and labour cost. In the UK, the pass-through of higher cost occurs on the anniversary of each bus route. The wage cost has sharply risen due to a shortage of bus drivers. To manage the shortage, higher priced agency bus drivers were deployed and more overtime billings were made. In China, rebates continued in undisclosed millions but lower than the $10mn in 2Q22.

• 1H22 revenue and PATMI were 49%/35% respectively of our FY22e forecast. Results were below expectations due to taxi rebates of S$10mn in China due to the lockdown.
• Huge operating leverage was underway in the results. Excluding government relief and non-recurring items, operating profit in 2Q22 jumped 2.5-fold to S$62mn.
• The recovery is at a nascent stage. Return to office and other activities started only in the later part of 2Q22. We expect 2H22 to be stronger. Taxi revenue will benefit from the rising number of trips and an increase in booking fees. Rail ridership is recovering strongly from a surge in ridership. No change in our forecast or DCF target price (WACC 8%) of S$1.80.

The Positives

+ Operating leverage on display. 2Q22 revenue rose S$84mn YoY, due to the huge fixed cost underlying the business, around S$38mn (or 45%) flowed to earnings. Operating profit before government relief and non-recurring items jumped 156% to S$62mn.

+ Higher dividends and healthy cash flows. FCF in 1H22 was healthy at S$191mn (1H21: S$288mn). The decline compared to last year was due to higher working capital requirements. The interim dividend was increased 36% to 2.85 cents but still far from the pre-pandemic level of 4.5 cents.  A special dividend of 1.41 cents (S$30mn) was declared to return the gain from the disposal of Alperton property in London. Net cash on the balance sheet is now S$643mn (1H21: S$493mn).

The Negative

- China rebates a major drag. Due to the lockdown in China, there was a need to provide $10mn rebates to taxi drivers in various cities. Comfort operates taxis in Beijing, Shanghai, Jilin City, Shenyang, Chengdu, etc. China suffered an operating loss of S$3.2mn in 2Q22 (2Q21: S$2.9mn). Taxi revenue for the group also declined due to the divestment of London (Jul21) and Ho Chi Minh (Mar22) taxi businesses.

Outlook

We expect the recovery to pick up in 2H22. Removal of restrictions in Singapore was largely only from 29 April. Taxi and ride-hailing trips registered a 20% YoY rise in May and June (Figure 1). The booking fee of 4% on drivers using its CDC Zig app from 1 May will contribute more meaningfully in 2H22. Taxi rental rebate of 15% will end in September 2022. With taxi driver takings improving, there is potential for rebates to end or decline. Weakness in taxi revenue will stem from the annual 7% decline in taxi fleet.

Public transport will benefit from the resurgence in rail ridership (Figure 2) benefiting from the return to office and increase in social activities. An offset will be a decline in bus contracting revenue effective 1 September 2022. As announced earlier in the transition of the Downtown Line to NRFF 2, the new rate is benchmarked against recent bus tenders and is lower than the current service fee.

On dividends, we model a 70% payout ratio. There is room for dividends to grow with earnings recovery. The dividend per share pre-pandemic was 9.8 cents.

Maintain BUY with unchanged TP of S$1.80

ComfortDelgro pays a 5% dividend yield, net cash balance sheet of S$643mn and its share price is still around 40% below pre-pandemic levels.

• Results were within expectations. 1Q22 revenue and PATMI were 24%/18% respectively of our FY22e forecast. Excluding the disposal gain and government relief one-offs, we estimate 1Q22 PAT to have increased 66% to S$42mn.
• A significant change in the taxi business model by shifting some revenue from rental to booking commissions. This is a critical strategic pivot as passengers shift away from street hail towards the use of booking apps.
• Revenue rose $34mn YoY in 1Q22 but with operating leverage, 40% of revenue flowed into operating earnings. No change in our forecast, except disposal gain, or our DCF target price (WACC 8%) of S$1.80. We expect the upcoming quarters to perform stronger with the opening of borders, removal of social restrictions and return to office announced in March and April this year.

The Positive

+ Improvement in public transport. Rail volumes were down 4% YoY in 1Q22. Revenue recovered due to fuel indexation and bus chartering business. Revenue rose $40mn YoY, of which $17mn, or 42%, flowed to operating earnings.   Operating margins jumped from 3% in 1Q21 to 5.3% in 1Q22.

The Negative

- Taxi still weak. Taxi revenues fell 11% YoY due to the 7% drop in the Singapore taxi fleet, divestment of the London taxi business and continuation of taxi rental rebates, especially in China. Despite the decline in fleet size, we believe taxis currently have a competitive edge over private hire vehicles due to a higher percentage of hybrid vehicles and lower fuel costs of 15-20%.

Outlook

The 15% rebate on taxi rental will continue until September 2022. However, effective 1 May, CD will impose a 4% booking fee on drivers that use its CDC Zig app. Assuming $200 of daily bookings per taxi, the additional S$8 revenue can offset the estimated S$15 to $18. At risk will be taxi operations in China. The pandemic lockdown especially in Beijing will require the need for rental waivers for taxi drivers. Public transport services (or rail) should benefit from workers returning to the office in Singapore. Upcoming CAPEX commitments include EV buses, EV taxis and EV charging stations.

Maintain BUY with unchanged TP of S$1.80

We find ComfortDelgro attractive for the expected 5% dividend yield, net cash balance sheet of S$578mn and share price still 40% below pre-pandemic levels.

• FY21 revenue and PATMI was 103%/75% respectively of our forecast. Excluding the one-offs, FY21 earnings were around 10% below expectations. The one-offs are an estimated S$27mn (disposal loss of buses, impairment and IPO expenses).
• Taxi rental rebates in FY21 were S$87mn. We expect rebates to decline to S$15mn-20mn in FY22e.
• In the past two years of the pandemic, the company has generated S$905mn in FCF. We expect FY22e to be an even stronger year of recovery. Reduction in taxi rebates, normalisation of social and work activities, re-opening of borders and lower depreciation will be key drivers to earnings. Our FY22e PATMI is lowered by 10% to S$231mn as we assume higher electricity and staff costs. FY22e revenue is relatively unchanged. Our DCF target price (WACC 8%) of S$1.80 is unchanged.

The Positive

+ Operating leverage intact. Despite a sluggish rebound in revenue of 3% YoY to S$915mn, operating leverage drove normalized PATMI to surge 10x to S$31.8mn. Contributing to the improvement in 4Q21 earnings was an S$18mn YoY decline in depreciation. The drop in CAPEX for the past two years will keep depreciation low.  

The Negative

- Sluggish taxi revenue. Taxi revenues were weaker than expected due to the continuation of rental rebates of around 25% in 4Q21. The rebates continued into 1Q22 at an estimated 15% rate. Higher taxi fares will help improve driver takings but an offset will be the jump in fuel costs.

Outlook

The challenge in FY22e will be higher fuel and electricity costs. Bus operations will be able to pass through the increased fuel costs due to fuel indexation. Taxi drivers will bear the brunt of higher fuel but improving economic activity and higher fares will soften the impact. Rail will bear the higher electricity cost as the ability to pass on the cost from higher rates is limited. Improvement in passenger traffic will be critical. Rebound in ridership was moderate in 2021, up only 5% to 744k/day (2019: 1.21mn/day). Earnings from Australia are expected to be stable due to the contractual nature of the bus services.

• 3Q21 earnings was below expectations. 9M21 revenue and PATMI was 70%/60% of our FY21e forecast respectively. Taxi rebates in 3Q21 resulted in operating losses.
• Downtown Line (DTL) transitioning to NRFF 2 resulted in a net S$15mn saving. But new bus contract extension may lower future operating earnings by S$34mn.
• The downside protection of earnings from NRFF 2 was lower than expected. At the peak of the restrictions last year, savings was only around S$15mn. Any shortfall in takings is limited to the license fee payable to authorities. We lower our FY21e PATMI by 8%. Our DCF target price (WACC 8%) is lowered modestly to S$1.80. The downside in revenue is offset by lower than expected capital expenditure. Operating cash-flows for the company remains healthy, coupled with record cash levels. Comfort is our transport proxy for Singapore’s reopening and normalisation of social and work activities.

The Positive

+ Healthy cash-flow. FCF generated during the quarter was around S$95.2mn (3Q20: S$137.7m).  Net cash has bulked up to S$458mn (3Q20: S$116mn), including finance lease. Despite the weak operating performance, operating cash-flows has been healthy. 9M21, cash from operations is S$582mn (9M20: S$428mn). Capital expenditure is around S$200mn p.a. against the S$350mn pre-pandemic.

The Negatives

- Taxi rebate still bite. Due to the continuation of restrictions in Singapore, there was a rebate of 25% given in taxi rentals. It will continue until November. As a result, taxi operations suffered S$8mn operating losses in 3Q21 excluding government relief. Losses have widened from the S$2.1mn in the prior quarter.

Outlook

With social restrictions and borders still largely closed, we expect muted earnings for 4Q21. The transition to New Rail Financing Framework version 2 (NRFF 2) was a disappointment (Appendix 1). We had expected higher cover for the losses experienced in DTL. However, the losses are limited to service charge payable and computation of the shortfall was combined or offset with NEL and SPLRT. Furthermore, advertisement revenue has to be returned to the authorities. Another negative surprise was the new bus contracts. Whilst the contract period has been extended, competition has driven down the service fee earned by S$34mn (Appendix 2). It is not disclosed if the extension could drive economies of scale or savings in other areas. Details of the contract are not fully disclosed. Separately, the planned listing of the Australian subsidiary has been halted due to challenging market conditions.

• 3Q20 PATMI below expectations due to lower-than-expected rail ridership and bus-service fees. 9M20 PATMI at 18% of our FY20e forecast.
• Revenue rebounded S$152mn QoQ to S$816mn. Operating losses narrowed by S$118mn QoQ. There is large operating leverage for Comfort as revenue rebounds. We expect a stronger recovery in the coming quarters.
• Net cash of S$115mn vs. net debt of S$115mn a year ago.
• Most restrictions on group gatherings in Singapore will be lifted only in 4Q20. Phase 3 easing should further increase transportation volumes. Upgrade stock from ACCUMULATE to BUY with earnings catalysts expected from this. PATMI for FY20e cut by 50% but FY21e estimate raised by 16%. Accordingly, our DCF TP climbs to S$1.83 from S$1.65. Comfort is our preferred proxy for a recovery in the transportation sector. Unlike air transport, passenger-volume rebounds are more immediate and pronounced with pricing more stable in a regulated industry.

The Positive

+ Heathy cash flows. 3Q20 net cash from operations, excluding grants, was S$167mn (3Q19: S$162mn) and S$383mn for 9M20 (9M19: S$407mn). This returned the company to net cash of S$115.5mn from S$115.3mn net debt in 3Q19.

The Negative

- Public transport softer than expected. Revenue improved 12% QoQ to S$640.8mn. Rail ridership was only 55% of pre-Covid levels in January. Another drag was lower bus-service fees from fuel indexation as fuel prices remained depressed.

Outlook

We are expecting further improvements in the coming quarters. Considerably larger group gatherings or events in Singapore will only be allowed in 4Q20. Phase 3 should further accelerate ridership in taxis and trains as more religious, social and work activities resume. An area of weakness will be U.K.’s second lockdown curtailing taxi and coach ridership.

Upgrade to BUY with higher TP of S$1.83, from S$1.65

We lower FY20e PATMI by 50% but raise FY21e forecast by 16%. Comfort has large market shares in rail, taxi and bus services in Singapore. It is our preferred transport proxy as the lockdown eases in Singapore.

• Revenue and PATMI were below expectations. The company suffered a net loss of S$6mn in 1H20 (1H19: +$146.3mn). No interim dividend for 1H20.
• Worst hit segment was taxi operations that swung into S$68mn loss in 1H20 (1H19: +S$57.9mn). Rental rebates and a $22.8mn provision of the diesel taxi fleet were some of the reasons for the loss.
• We were surprised by the large decline in public transport earnings caused by bus operations that do not assume ridership risk and schedules were not severely cut.
• A year to forget but a bottom has likely formed and a recovery is underway, albeit tepid. We are upgrading to ACCUMULATE with a higher target price of S$1.60 (prev: $1.50). Our PATMI for FY20e is slashed by 24% but FY21e forecast is raised 12%. Comfort is our preferred proxy to the easing of lockdown measures compared to the air transport sector. Comfort has a 60% market share of bus and taxi services in Singapore plus a 36% share in the rail network. The high fixed cost of the business can also lead to steeper operating leverage as activity improves.

The Positive

+ Positive operating cash-flows. Despite the net loss, Comfort generated S$214mn of operating cash-flow in 1H20. It reflects the high fixed cost of the business, where annual depreciation is S$450mn per annum and another S$1.7bn staff cost. Government relief of almost S$73mn compensated for some of the loss in revenue.

The Negatives

- Public transport profits also collapsed. As Comfort assumes rail ridership risk, the drop in revenues and profits was expected. We were surprised that bus services profits similarly plunged despite schedules not as severely curtailed as a rail. Bus schedule cut in Singapore was for cross border services into Johor and CDB routes. Bus does not bear ridership risk but the decline in fuel prices affected profits as we believe Comfort earns some margins from the fuel too. Excluding the government relief of S$63mn, 1H20 would be a loss of S$7mn.

- Taxi operations swung to losses. Taxi division incurred a loss of S$68mn in 1H20. We estimate the rental rebates provided by Comfort to its Singapore taxi drivers in 1H20 was around S$80mn. A further hit to the results was an impairment of S$22.8mn for scrapped diesel taxis.

- Interim dividend cancelled. Comfort will not pay an interim dividend due to the losses suffered (1H19: 4.5 cents). We are forecasting a full-year dividend of 2.8 cents, as we expect profitability in 2H20 and cash-flows of the company remain healthy.

Outlook

We believe transport activity has bottomed but recovery will be tepid especially for taxis.

Taxi - Taxi driver earnings are held up currently relief measures from both Comfort and the government. Around 1/3 of taxi driver takings is due to government support measures. Comfort taxi fleet size was around 11,000 in Dec19 (or 60% share). The fleet has declined to 9,000 plus currently. The Singapore taxi fleet is down around 2,456 units (or 13%) this year to 16,086. Whilst details are lacking, Comfort share of taxis is likely maintained around 60%, however, Comfort typically experiences the lowest unhired or utilization rate amongst its peers.

Rail / Bus - Rail traffic is starting to climb back up sharply from the low in May (Figure 2). There are two tenders pending award in Singapore (Bulim by Tower Transit and Sembawang-Yishun by SMRT) that are currently not run by SBS. This will be an opportunity to further grow its current 61% market share in public bus services.

Upgrade to ACCUMULATE with a higher target price of S$1.60 (prev. S$1.50)

We lowered PATMI for FY20e by 24% but this was offset by FY21e forecast being raised by 12%. Comfort enjoys a large market share in rail, taxi and bus services in Singapore. It is our preferred transport proxy as the lockdown eases in Singapore.

• Revenue and PATMI were below expectations. 1Q20 PATMI fell 49% YoY, dragged down by taxi profits declining 92% YoY. The full impact of circuit breaker and rental rebates to taxi drivers in Singapore will occur in the following quarter.
• Comfort will be providing a total of S$116mn worth of taxi rental rebates. Rebates started in mid-February and will end in September. The bulk of the rebates will occur in 2Q20 when 100% waiver of rent is given for almost two months.
• The taxi operations will be loss-making in FY20 due to the rebates. The rental relief from Comfort will help retain taxi drivers longer than competitors. We expect the path to recovery will be gradual. Social distancing behaviour, working from home and the decline in tourist will all weight on passenger volumes. We downgrade to NEUTRAL with a lower target price of S$1.50 (prev: $2.20). Our PATMI for FY20e is slashed by 62%. It excludes the job support scheme to be received from the government.

The Positive

+ Free cash-flow of S$57.4mn in 1Q20. In 1Q20, Comfort generated free cash-flows* of S$57.4mn (1Q20: +S$0.4mn). Operating cash-flow of $S105.5mn during the quarter was higher than a year ago (1Q19: S$95.6mn). This allowed the company to turn net cash position of S$26.mn against the net debt of S$40mn as at end Dec19.

*Operating cash-flow less capital expenditure

The Negatives

- Taxi profitability plunged. Taxi operating profit plunged 92% to S$2.4mn. Rental rebates and lockdowns depressed earnings and volumes respectively. Of the S$116mn of rental rebates to Singapore taxi drivers, we believe only S$13.7mn was incurred in 1Q20 (Figure 2).

- Bus operations are not immune. The lower frequency in bus mileage will impact revenues. The service fee paid by the authorities is dependent on mileage travelled. 1Q20 there was less impact on Singapore. Reduction in advertisement revenue was another negative driver for earning.

- Overseas operations perform poorly. Poor weather and a declined in tourism pushed the UK and Ireland operations into losses. China similarly swung into losses due to lock-downs and rental relief to taxi drivers.

Outlook

Taxi – Comfort taxi drivers will receive rental relief in stages from 13 February onwards (Figure 1). Taxi drivers will also receive 100% rental waiver from 7 April to 1 June, to coincide with the circuit breaker period. We estimate the rental rebates from Comfort in 2Q20 will be around S$68.9mn (Figure 2). Taxi operations are expected to be loss-making in FY20e.

Public transport - Public bus and rail ridership was down between 70-75% during the circuit breaker period. Lower mileage operated will lead to less service fee to be received from the authorities. However, capacity needs to be close to pre-Covid level because safe distancing measures cannot totally be enforced on public transport. Rail operations will bear the full brunt from the collapse in ridership.

Downgrade to NEUTRAL with a lower target price of S$1.50 (prev. S$2.20)

The recovery will be slow. Bus operations can recover faster as revenue depends on capacity, not passenger volumes. However, rail and taxi will suffer for a more prolonged period. The unknown for us will be the number of taxi drivers churning out of or into Comfort. With rental rebates still underway, the taxi fleet for Comfort has been relatively stable.