• Revenue and PATMI were below our expectations.
• Revenue growth of 1.1% YoY was due to the bus acquisitions in Australia and the UK.
• Railway margins depressed by higher operating and maintenance costs for rail operations and increasing DTL fixed charges by LTA.
• Competitive pressures remain for the taxi business despite stabilising fleet size.
• Maintain ACCUMULATE with a lower target price of S$2.56 (previous target price: $2.99). Our PATMI for FY19e is lowered by 2.3%.

The Positive

+ Revenue growth from acquisitions, offset by weak existing businesses. ComfortDelGro’s (CDG) revenue grew by 1.1% YoY in 3Q19. The improvement is attributed to contributions from newly acquired bus businesses in Australia and UK, offset by significant foreign exchange impact and weaker taxi revenue. As for trains, revenue growth was led by DTL, with ridership increasing 4.1% YoY. 

The Negatives

– Margin pressure for the railway. Although losses have narrowed for the DTL line, it is offset by higher repairs and maintenance costs for NEL and LRT. Repairs and maintenance costs increased 3% YoY. The fixed DTL license charges of $15mn in 2019 is expected to increase by $5mn every year going forward. The DTL line is not expected to breakeven in the near term due to the growing fixed charges. 

– Intense competitive pressures remain for the taxi business. 3Q19 Taxi revenue/EBIT fell by 10.9%/18.5% YoY, due to continued competition from private hire operators in Singapore. Fleet size has stabilised at 11,000-12,000, while utilisation rates are fairly constant. CDG has noted that Grab is less aggressive in incentivising drivers. Assuming that there is no renewed competition from ride-hailing apps, CDG will maintain the current size of its fleet.

Outlook

The overall outlook is muted in the short-term. We expect narrowing losses from rail operations due to higher ridership and fare increases, though it will be partially offset by higher repair and maintenance costs and DTL fixed charges. The taxi business remains profitable and the decline in fleet size will be lower with less competitive pressure. We believe growth opportunities from new accretive acquisitions will offset the weaker transport and taxi segments and drive growth for CDG in the long-term. With a net gearing ratio of 30%, CDG would have $670mn to undertake new acquisitions.

 Maintain ACCUMULATE with a lower target price of S$2.56

We maintain our ACCUMULATE call with a lower target price of S$2.56 (previous target price: $2.99). We lowered our EBIT forecast for 2019e due to higher operating costs and weak taxi business. Our target price gives an implied FY19e forward P/E multiple of 18.6 times.