Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


ComfortDelGro - 3Q22 Slightly Below Expectations; Better Fundamentals Dragged by Higher Costs

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  • Despite reporting higher 9M22 revenue (+8% y-o-y) and PATMI (+31% y-o-y), ComfortDelGro’s 9M22 results were slightly below our expectations as margins start to compress. The Public transport services segment reported higher revenue but rising wage costs and lower bus service revenue impacted profitability.
  • With the relaxation of most COVID-19 measures in Singapore, pent-up demand and taxi commissions gave taxi revenue and earnings a boost.

ComfortDelGro's 3Q22: Improved Underlying Performance

  • Slightly below expectations, ComfortDelGro (SGX:C52) reported 9M22 revenue and PATMI of S$2,829.4m (+7.9% y-o-y) and S$153.0m (+31.0% y-o-y) respectively, accounting for 74.2% and 67.2% of our full-year forecasts respectively. 9M22 core operating profit (excluding government relief and one-off adjustments) increased 89.1% y-o-y to S$180.6m, backed by improving economic activity in key markets and higher fuel indexation revenue.
  • For 3Q22, revenue (+10.1% y-o-y) and PATMI (+32.9% y-o-y) grew, backed by increased rail ridership and taxi passenger demand.

Razor-thin margins

  • Despite surging 170.7% y-o-y, ComfortDelGro's 3Q22 core operating profit fell 14.0% q-o-q as increasing operation costs eroded profitability.
  • Core operating margins softened 0.9ppt q-o-q due to higher wages from the public transport services and increasing inflationary pressures across all key geographies. Also, starting 1 Sep 22, lower service revenue from the five recontracted bus packages due to the transition of the downtown line to the New Rail Financing Framework Version 2 also contributed to the decline in margins.
  • However, backed by the relaxation of COVID-19 measures in Singapore, stronger 3Q22 contributions from the taxi segment mitigated a further deterioration in margins.

Public Transport: Near-term Margin Pressure..

  • Both 9M22 segmental revenue and operating profit were in line with our expectations, forming 76.2% and 72.2% of our full-year forecasts. Similar to 2Q22, 3Q22 segmental revenue (+8.7% y-o-y) and core operating profit (+48.0% y-o-y) continued to grow, aided by improving rail ridership in Singapore along with higher fuel indexation revenues.
  • Despite negative forex impacts, improvement in charter services in Australia and the UK also supported earnings as most COVID-19 restrictions were relaxed. However, on a q-o-q basis, 3Q22 core operating profit fell 41.7%, dragged by lower margins from the five recontracted bus packages and higher cost pressures.
  • A shortage in bus drivers across key geographies, coupled with rising operating costs from the rail segment, also impacted margins in 3Q22. The newly-won bus contracts in Australia (Regions 4/12/14) are not expected to boost margins given that they were bid competitively due to strong competition.

… to be offset by upcoming indexation and government grants.

  • To combat rising inflationary pressures, ComfortDelGro is set to undergo the relevant CPI-linked indexation for its Singapore and Australian bus packages in early-1Q23, supporting margins from 1Q23 onwards.
  • Furthermore, as announced in Oct 22, the Public Transport Council in Singapore has granted a 2.9% fare hike effective from 26 Dec 22, in a bid to help rail transport operators offset rising operating costs. The 2.9% fare hike was a fraction of the maximum 13.5% fare adjustment allowed and would have been insufficient to cover rising costs in our view, given that ComfortDelGro and SMRT applied for the maximum 13.5% fare increase. However, the Singapore government has then stepped in with an S$200m subsidy meant to cover the remaining 10.6% shortfall in 2023.
  • We reckon that the government grant would help ComfortDelGro offset rising operating costs substantially and is expected to start in early-1Q23.

Taxi: Post COVID-19 Recovery

  • Slightly above our expectations, 9M22 taxi revenue and operating profit formed 69.8% and 80.2% of our full-year forecasts, backed by a robust 3Q22. 3Q22 revenue (+15.4% y-o-y) and core operating profit of S$15.5m (3Q21: core operating loss of S$8.1m) grew as taxi passenger demand surged from the relaxation of COVID-19 measures in Singapore, along with a full quarter of contribution from taxi commissions. There were around 9m taxi bookings in 3Q22 as compared to 6m in 3Q21. Based on our estimates, around 35-40% of 3Q22 taxi core operating profit was from taxi booking commissions.
  • The ongoing taxi rental rebates are currently up till end-4Q22, which in our view, an extension would be granted in early-1QFY23 to retain/attract taxi drivers, given the stiff competition with ride-hailing companies.
  • To ensure segmental profitability, we opine that ComfortDelGro would also increase the taxi booking commission rate from the current 5% to mitigate the impact of the possible rental rebate extension. As China carries on with its zero-COVID policy, any shift in policy stance remains a key potential catalyst for this segment.

ComfortDelGro – Earnings Forecast Revision and Recommendation

  • We decrease our 2022-24 PATMI forecasts, on the back of higher operating costs assumptions. Our new 2022/23/24 PATMI forecasts for ComfortDelGro are S$194.9m (S$227.8m previously), S$186.0m (S$253.4m previously) and S$202.9m (S$277.4m previously) respectively.
  • Maintain BUY with a slightly lower 2022 SOTP-based target price. The lower target price is due to lower market valuation for ComfortDelGro’s SBS Transit (SGX:S61) and VICOM (SGX:WJP) stakes. Our target price implies 17x 2022F P/E, similar to its 5-year average mean P/E.
  • In our view, backed by improving fundamentals, ComfortDelGro remains poised to see a gradual recovery in ridership levels in the medium term as key markets recover and international travel resumes.

Source: UOB Kay Hian Research - 15 Nov 2022

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