The Positive
+ Strong revenue contributions from bus businesses. ComfortDelGro’s (CDG) Revenue/EBIT grew by 8.4%/15.8% YoY, while operating margin improved from 8.0% in 1Q19 to 8.7% in 2Q19. The improvement is largely attributed to contributions from newly acquired bus businesses in Australia, partially offset by meaningful FX losses and higher staff costs from the acquisitions. Singapore bus business also saw higher mileage and contributions from new bus contracts (Seletar and Bukit Merah) packages.
The Negatives
– Headwinds from higher operating and maintenance costs for rail operations. DTL ridership grew 6.9% to 467k in 2Q19 as compared to 10.4% growth in 1Q19. Although losses have narrowed for the DTL line, it is partially offset by higher repairs and maintenance costs as NEL and LRT lines moving into their mid-life cycles. The DTL license charges due this year will be a hit to rail operating profit. Though CDG is in discussions with LTA to defer the charges as DTL is still loss-making.
– Intense competitive pressures remain for the taxi business. 2Q19 Taxi revenue/EBIT fell by 9.6%/7.8% YoY, mainly due to continued competition from private hire operators in Singapore. Idle rates for taxis have increased due to contraction of fleet size and higher attrition rates of drivers. The Australian business faces a similar predicament, while China business is plagued by less taxi drivers opting for the double shift and lower government subsidies for vehicle replacement.
Outlook
The overall outlook remains positive. We believe the focus in overseas acquisitions and bidding of new bus routes (South Australia and Perth) will provide earnings upside. We also 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. The taxi business remains challenging in the short term as competition remains stiff from ride-hailing apps. The plan to switch from diesel to hybrid cars which command higher rental and lower fuel consumption is delayed near-term due to supply shortage. Nevertheless, new business opportunities from overseas expansion will more than offset the ailing taxi business.
Maintain ACCUMULATE with a target price of S$2.99
We maintain our ACCUMULATE call with an unchanged target price of S$2.99. Our target price gives an implied FY19e forward P/E multiple of 18.6 times.
Edmund covers the US Market Strategy. He was previously a risk transformation consultant in the Big Four.
He graduated with a Bachelor of Accountancy (Honours) with a major in Finance from the National University of Singapore.
