ComfortDelGro Corp Ltd: Oversold and earnings to bottom this year August 14, 2017

PSR Recommendation: BUYStatus: UpgradedTarget Price: 2.78
  • 2Q revenue in line with our forecast
  • 2Q PATMI exceeded our forecast by 13% on lower than expected operating expenses
  • 1H17 interim dividend of 4.35 cents, higher than 1H16’s 4.25 cents
  • 75%-owned subsidiary, SBST, reported a strong set of results
  • Upgrade to Buy from Accumulate; lower target price of $2.78 (previously $3.02)

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The positives

  • 75%-owned subsidiary, SBST, contributing positively. SBS Transit’s (SBST’s) Public Transport Services segmental 2Q17 EBIT improved to $7.26 mn from $435,000 loss a year ago. The improvement was due to the transition to the Bus Contracting Model (BCM). Consequently, SBST’s 2Q17 NPAT grew 75% YoY to $12.7 mn, thus mitigating impact from foreign currency translation and weaker underlying business for the Group.
  • Higher interim dividend, mirroring SBST. 3.65 cents interim dividend at SBST is higher compared to the 2.35 cents a year ago. SBST’s payout ratio over 1H17 and 1H16 EPS is comparable, at 49.5% and 47.4% respectively. ComfortDelGro’s payout ratio over 1H17 and 1H16 EPS is 58.7% and 57.8% respectively.

The negatives

  • Singapore Taxi business continues to be challenged by private hire vehicles. Comfort and CityCab 2Q17 combined taxi fleet is -3.1% QoQ and -8.9% YoY. 2Q17 idle rate was 5%, compared to the 3.0%-3.5% in 1Q17. Taxi bookings are -20% YoY. We believe Singapore Taxi EBIT-margins are likely to be eroded to single-digit, from historical low-teens, and now contributing an estimated 10%-15% of Group EBIT, from historical 20% of Group EBIT.
  • Higher losses at DTL, dragging down Rail segment. Costs at Downtown Line (DTL) were higher sequentially, in preparation for DTL3 revenue service commencing on 21 October. Fixed costs for DTL should be peaking and the higher revenue from ridership should largely flow through to profits despite the higher variable costs (electricity & maintenance). North East Line remains profitable with 1.4% YoY ridership growth.

Outlook

The outlook is positive. Although immediate-term earnings are weighed down by weaker Singapore Taxi business and foreign currency translation effects, there are several visible developments in the pipeline: (1.) opening of DTL3 to contribute positively from 4Q17, (2.) full year impact of BCM in 2017, (3.) Seletar bus package contribute positively from 1Q18. Consequently, we see PATMI bottoming this year. Positive catalyst if ComfortDelGro is awarded the contract to operate the Thomson-East Coast Line.

Upgrade to Buy from Accumulate; lower target price of S$2.78 (previous: S$3.02)

Made some tweaks to our assumptions. FY17e/FY18e revenue is -0.4%/-0.9% from previous and PATMI is +3.1%/+1.2% from previous. We also have a higher WACC of 7.8% (previously: 7.5%). Our target price represents an implied 20.6x FY17e forward P/E multiple, compared to the Straits Times Index twelve-month forward P/E multiple of 14.7x.

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About the author

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Richard Leow
Investment Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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