• FY17 revenue in line; PATMI came in 4.3% lower than our estimate, on higher than estimated opex in 4Q17
• 05 cents final dividend proposed (unchanged from previous year)
• FY17 10.4 cents total dividend (75% payout), higher than FY16 10.3 cents (70% payout)
• Maintain BUY; lower target price of $2.50 (previously $2.63)

The Positives

• 3% YoY increase in SBST profit led by full year effect under the Bus Contracting Model. CDG’s 74.82% stake in SBS Transit (SBST) contributed 11.7% of FY17 PATMI, compared to 7.4% in FY16. SBST’s profit is expected to increase in 2018 with full year contribution from DTL3 which opened on Oct 21, 2017. We expect a narrowing of operating losses. The takeover of the Seletar bus package on Mar 1, 2018 is expected to contribute positively also.
• DTL on track for 500k daily ridership by end-2018. The Land Transport Authority stated in a News Release on Feb 10, 2018 that daily weekday ridership on DTL has grown from 300k to 470k since DTL3 opened. FY17 DTL average ridership was 279k, and we estimate 4Q average daily ridership to be about 371k.
• Higher full year dividend, despite lower profit. Final dividend of 6.05 cents is unchanged from last year. The higher full year dividend arises from the 1H17 interim dividend of 4.35 cents compared to 4.25 cents in 1H16. Higher dividend payout ratio indicates that more cash has been made available, due to the lower capex for the Taxi business.

The Negatives

• 4Q17 was a weak quarter compared to historical. Quarterly PATMI sank to S$59.5mn, dipping below the most recent low of S$59.9mn in 4Q13. On a YoY basis, 4Q17 revenue was flat at -0.6%, but a 1.2% increase in opex resulted in -16.9% EBIT. Operating margin in 4Q17 had compressed to 8.4% from 10.0% a year ago.
• 4Q17 Comfort & CityCab taxi fleet contracted 10.7% QoQ and 21.3% YoY. Idle rate for the quarter maintained at a “low single digit”, aided by fleet size rationalisation. Idle rate in the previous three quarters ranged between 3% and 5%.
• DTL loss in 4Q17 had widened QoQ, but should narrow from here on. This is on the basis that the full DTL is now operating and no longer incurring start-up costs. However, it will take some time to turn profitable, due to ramp-up of ridership to normalised level.

Outlook

The outlook is stable. We see the rental car population growth moderating, and believe an equilibrium between taxi population and rental cars population being reached soon. Narrowing of the DTL losses and contribution from the Seletar bus package will contribute positively in 2018.

Maintain BUY; lower target price of $2.50 (previously $2.63)

We have re-modelled our assumptions, as we move into FY18. Our new target price gives an implied FY18e forward P/E multiple of 17.4 times. The 5.2% dividend yield is sustainable and attractive.

Key Takeaways

Management shared some insights to some of the ongoing issues.

Strategy for Singapore Taxi business segment

• Rationalise fleet size according to utilisation; target is to keep the idle rate low
• Older Hyundai Sonata taxis will be being scrapped if necessary; and hirers may be asked to switch to the newer Hyundai i40 or Toyota Prius
• Should there be a turnaround in demand from taxi hirers, CDG is eligible to grow back the fleet at 2% p.a., having met the Taxi Availability standards. However, there is currently no intention to grow the fleet.

Strategic alliance with Uber

• Acquisition of 51% stake in Lion City Rentals (LCR) is pending regulatory approval.
• Acquisition of LCR is independent from the ongoing UberFLASH The UberFLASH partnership will continue, even if the LCR acquisition does not materialise.
• Revenue model for Uber is that it collects a fee for each ride processed through UberFLASH. At the same time, UberFLASH makes dynamic pricing model available to CDG taxi hirers. This is to improve earnings for hirers and improve retention for CDG.

Transition to the New Rail Financing Framework (NRFF)

• Negotiations with LTA are ongoing and nothing further was shared.
• Recall that under the Licence Condition for Rail Services, SBST is contractually obligated to purchase the operating assets for the North-East Line, Punggol LRT and Sengkang LRT from LTA. However this was put on hold due to SMRT’s transition to the NRFF in 2016.
• Key concern is how the deal will be priced, relative to SMRT’s.

Turnaround for DTL expected in 2019

• DTL remains loss making with operating loss widening in 4Q17.
• Management’s expectation of the turnaround in 2019 is contingent on average daily ridership achieving 500k and outcome of fare revision exercise. A fare reduction would delay the operational turnaround.

Capital management on M&A activity

• Management shared that it is not averse to gearing up the balance sheet from a net cash to net debt position if suitable acquisition opportunities arise, provided that an acceptable return on capital can be achieved.
• A possible level of gearing could be up to 30%.