ComfortDelGro Corp Ltd: Strong cash generation, absolute dividend level sustainable November 13, 2017 1769

PSR Recommendation: BUY Status: Upgraded
Target Price: SGD2.69
  • Revenue in line with our estimate
  • PATMI 15.8% better than we expected, due to lower YoY opex that yielded better than expected operating margin
  • Maintain Buy; lower target price of $2.69 (previously $2.78)

1

The positives

  • Improved profitability at SBST is making an impact to CDG. CDG’s 74.82% stake in SBS Transit (SBST) contributed 10.4% of 3Q17 PATMI, compared to 6.7% contribution in 3Q16. This is on the back of SBST’s 42.1% YoY higher 3Q17 profit and to a lesser extent, CDG’s 8.2% YoY lower PATMI. We estimate that SBST would have contributed ~9.3% of CDG’s 3Q17 PATMI, had the rest of CDG’s business remained unchanged YoY. SBST’s profit is set to further increase in 2018 from the opening of DTL3 on 21 October 2017 and takeover of the Seletar bus package from 1Q18.
  • Lower profit, but cash flow has actually improved: absolute dividend level should be sustainable. 9M17 PAT is 5.1% lower YoY to $277.7 mn. However, free cash flow (net cash from operating activities minus capex) is 29% higher YoY to $194.8 mn. This leads us to believe that the FY16 dividend of 10.3 cents can be maintained this year.

The negatives

  • Singapore Taxi business continues to be challenged by private hire vehicles. Comfort & CityCab taxi fleet is -4.7% QoQ and -12.1% YoY as at end of 3Q17. 3Q17 idle rate was 4.5%, compared to 5% and 3.0-3.5% in 2Q17 and 1Q17 respectively. Fleet size in 4Q17 will see a net reduction as some of the older Sonata taxis are replaced with the hybrid Prius taxi.
  • Effective 2.2% fare reduction from 29 December will delay the breakeven for DTL. Management estimates that DTL breakeven will be delayed to early 2019. This is also on the premise that 500k average daily ridership can be maintained. The fare reduction only impacts NEL and DTL, as public bus services are already on the government contracting model and do not depend on fare revenue.

Outlook: Positive

Concerns over the contraction in the Singapore Taxi business are valid, but we think the sell down of the stock has been over-done. The Singapore Taxi business remains profitable. While Group profit is lower, free cash flow has actually improved owing to lower Taxi capex. Moreover, both the Singapore public Bus business and DTL are on an asset-light model. DTL3 will make its full quarter contribution from 1Q18 onwards. The Seletar bus package will contribute positively from 1Q18 as well. Consequently, we see PATMI bottoming this year. Sustainable dividend makes the now 5.2% yield attractive.

Maintain Buy; lower target price of S$2.69 (previously $2.78)

We made some tweaks to our assumptions for the -2.2% fare adjustment (previously assumed -1%) and to the right-sizing of the taxi fleet. Higher WACC of 8.4% used from previous 7.8%, with terminal growth unchanged.

2

Key Takeaways

Management shared some insights to some of the ongoing issues.

Strategic alliance with Uber

  • Negotiations are ongoing and nothing material was disclosed.
  • From what we hear, we interpret that if any alliance materialises, it will leverage on Uber’s technology i.e. Uber’s app will be chosen over CDG’s.
  • Some margin may have to be given up in the partnership, as a trade-off to stemming the business contraction.

Transition to the New Rail Financing Framework (NRFF)

  • Negotiations with LTA are ongoing and confidential.
  • 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.

Media report of over 3,000 drivers moving over to Grab

  • Management clarified that the 3,000 drivers mentioned in the media had not moved over to Grab, but merely downloaded the app.
  • Taxi hirers were paid $100 to download the Grab app and $75 for the first ride they take.
  • Management shared that the actual number of drivers who left is in the “low hundreds”.

UK Bus business

  • Metroline (London public bus service) revenue is expected to be fairly stable, as Management expect GBP to appreciate against SGD.
  • Stansted Coaches (coach service between Stansted airport and Central London): faces erosion by rail and cheap Uber taxis. The business is being reviewed “carefully”.
  • Scottish Citylink (inter-city coach service from Scotland): facing tough competition from National Express Coaches and other players giving discounts.

Having said that, Metroline contributes 90% of the UK Bus business, so the overall UK Bus business should remain stable.

Important Information

This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.

By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.

This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.

Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.

Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.

To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.

The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.

This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.

IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE

Where the report contains research analyses or reports from a foreign research house, please note:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

About the author

Profile photo of Richard Leow

Richard Leow
Research 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 (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!