ComfortDelGro Corp Ltd – Zig platform led the recovery

 

 

 

 

 

 

 

 

 

 

 

 

The Positive

+ Operating leverage from Zig platform. Taxi earnings jumped around 39% YoY to S$23mn. The rise was due to higher commission rates and platform fee charged on the Zig ride-hailing app. Another boost to earnings was the turnaround in China from lower rental discounts.

The Negative

- Decline in Australia earnings. Australia's operating earnings declined by 16% to S$9.2mn. Lower margins in public bus renewals especially in Sydney and other New South Wales routes dragged earnings lower.

ComfortDelGro Corp Ltd – More growth ahead

 

 

The Positive

+ Jump in China taxi earnings. Operating profit in China jumped almost 4-fold to S$7.8mn in 4Q23. Earnings recovered as rebates were removed. Demand for vehicles has been strong, and ComfortDelGro is looking to expand its fleet to accommodate the demand.

 

 

The Negative

- Meagre rail earnings. We expect Singapore rail operations to be barely profitable. The rise in wages and electricity has impacted margins. We believe margin recovery will occur in FY24e from the lagged 7% rise in fares and slower rise in operating costs, especially electricity.

ComfortDelGro Corp Ltd – Higher pricing supporting margins

Source: Company, PSR #Note – Only selected financials are provided in the 3Q23 update.

The Positive 

+ UK operations turnaround. A major part of earnings growth in 3Q23 was the turnaround in UK operations. From an operating loss of S$2mn, UK swung to a S$6mn profit. Around 70% of the routes have been re-indexed. Another boost to margins will be re-contracting of the bus contract routes that can expire up to 5 years. Recent re-contracting has seen a significant improvement in margins. 

 

The Negative 

- Rail profitability is still weak. We believe profitability in Singapore rail remains weak despite the jump in passenger traffic. Rail operations are burdened by the higher electricity and a lagged re-pricing of fares. The next round of higher fares will be in December this year. 

 

Outlook 

We expect earnings growth to sustain into FY24e, supported by re-pricing of bus contracts in the UK, improvement in bus efficiency in Australia as drivers return, platform fees raising taxi margins and higher fares driving up Singapore rail profitability. Taxi operations in Singapore have seen a resurgence in competitive pricing by other platforms but Comfort’s taxi fleet has remained stable with market share rising.  

 

Maintain BUY with an unchanged TP of S$1.57 

ComfortDelgro pays around 4.6% dividend yield, enjoys a net cash balance sheet of S$500mn and visibility of earnings recovery.  

ComfortDelGro Corp Ltd – Recovery building momentum from repricing

 

The Positives

+ Taxi profits doubled. 2Q23 margins improved with higher booking volumes, additional booking commissions, lower rebates in Singapore (15% to 10% from Apr23) and reduced taxi rebates and costs in China. Another driver to earnings has been a stable taxi fleet in Singapore. Comfort’s taxi fleet grew 0.8% YoY to 8,782, after several years of decline.

 

+ Cash piling up and returning to shareholders. Comfort continues to generate healthy free-cash-flows (FCF). 1H23 FCF was S$86.4mn (1H22: S$88.5mn), pilling up the net cash to S$565mn. Capital expenditure is now trending at S$350mn p.a. compared to pre-pandemic S$450-500mn. Comfort has raised its minimum dividend payout ratio from 50% to 70%. We estimate S$131mn of dividends to be paid out this year.

 

The Negative

- Lethargic in margins for public transport. Public transport operating margin has been the weakest spot for Comfort. 2Q23 margins was 4%, an improvement over 3.4% in 1Q23 but far below pre-pandemic 8%. Bus operations across the UK, Australia and Singapore are depressing margins. The worst hit is the UK which reported an operating loss of S$0.5mn. A combination of irrational tendering activity and a spike in bus driver fees has negatively impacted margins. Australia is suffering from higher overtime salaries and other “running time” charges due to the lack of bus drivers.

 

 

ComfortDelGro Corp Ltd – Inflationary pressures gradually abating

 

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.

ComfortDelGro Corp Ltd – Weighed by upfront costs

 

 

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.

ComfortDelGro Corp Ltd – Major drag overseas

 

 

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.

ComfortDelGro Corp Ltd – Recovery is underway, except China

 

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.

ComfortDelGro Corp Ltd – Modest recovery but huge operating leverage

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.

ComfortDelGro Corp Ltd – Still our recovery + reopening proxy

 

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.

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