• Revenue and PATMI were within expectations, excluding S$27.3mn impairment on the taxi business. Excluding provisions group PATMI would have declined an estimated 5%.
• Public transport services was surprisingly the worst hit segment with 25% YoY drop in 4Q19 operating profit. We believe a lumpy license fee could have been the trigger.
• Headline results was weak due to provision in taxi business and likely license fee expenses. We maintain ACCUMULATE but with a lower target price of S$2.20 (prev: $2.56). Our PATMI for FY20e is lowered by 16% to account for weaker traffic, rental rebates and disruption in China operations.

The Positive

+ Excluding the provisions, taxi EBIT jumped 36% in 4Q19 due to margin expansion. 4Q19 taxi revenue falling by 6% YoY, brought on by private hire competition in Singapore and China and a smaller operating fleet. We believe EBIT was 36% higher driven by margin expansion from the use of hybrid vehicles, which command higher rental and were purchased at the low of the COE cycle. Earnings was surprising strong once we excluding the S$27.3mn impairment provision on the taxi business.

The Negatives

– Public transport earnings collapsed. The biggest disappointment was the 44% collapse in earnings at the public transport division (i.e. bus and rail). Margins were expected to narrow due to increased repairs and maintenance required for the rail, however the decline was more pronounced than expected. Higher fares will offset some of this cost. SBS Transit reported a spike in other Opex by S$12mn YoY in 4Q19 which we believe is attributed to a one-off license cost incurred in 4Q19.

– The final dividend cut by 14% YoY. Full-year dividend payout ratio rose from 75% in FY18 to 80% in FY20. However, weaker earning led to full-year DPS to drop from 10.5 cents to 9.79 cents in FY19. The dividend yield is now 4.4%.

Outlook

Taxi – Competition from private hire will remain intense. As a reflection of the competition, end-Dec19 the private hire to taxi ratio in Singapore was 4.2:1.  For every 1 taxi on the street, there are 4 competing private hire vehicles. The ratio was 3.2 last year. It is difficult to ascertain if competition has peaked given that the disruption from tech-enabled players is unprecedented. The need for newly listed Uber and Lyft to report profitability or path to profitability could be a catalyst for Grab to lower driver incentives. Comfort’s introduction of hybrid vehicles will stem some of the revenue loss. Hybrid vehicle command higher rental and were purchased at the low of the COE cycle, reducing the cost of inventory. In return, drivers enjoy lower fuel cost in return. The conversion of the fleet to hybrid is still underway. There will be rental rebates provided by Comfort in-view of the current COVID-19 outbreak.

Public transport – Rail revenue in Singapore will get an uplift from higher fares but traffic is sluggish and margins weighted down by license fees and higher repair and maintenance cost.

Overseas – China operations will face disruption across all divisions including taxis and bus terminal. China accounts for 4% of FY19 revenue (Singapore: 58%).

Maintain ACCUMULATE with a lower target price of S$2.20

We maintain our ACCUMULATE recommendation but the target price is lowered to S$2.20 (previous target price: $2.56). We have cut our FY20e earnings by 16% to account for weaker traffic, rental rebates and disruption in China operations.