Highlights

ComfortDelGro - Cautious on Taxi Business Outlook

Date: 15/05/2019

Source  :  RHB
Stock  :  ComfortDelGro       Price Target  :  2.65      |      Price Call  :  SELL
        Last Price  :  2.36      |      Upside/Downside  :  +0.29 (12.29%)
 


  • TAKE PROFIT, SGD2.65 Target Price offers 3% upside with 4% FY19F yield.
  • We remain optimistic that ComfortDelGro’s earnings growth will recover this year, aided by contributions from new acquisitions and growth in its public transportation business. However, management turning cautious on its taxi business outlook is a cause for concern.
  • Trading at 17.2x 2019 P/E (vs 5-year average of 15x), ComfortDelGro seems fairly priced, in our view. Investors could consider buying, if ComfortDelGro's share price drops to SGD2.40.
  • Earnings-accretive acquisitions or higher dividends offer upside risks.

ComfortDelGro's 1Q19 Results in Line

  • COMFORTDELGRO CORPORATION LTD (SGX:C52) reported 1Q19 PATMI of SGD70.4m (+6.2% y-o-y), which accounted for 22% of our/Street 2019 estimates.
  • New acquisitions, carrying a revenue of SGD54.7m, accounted for 80% of the growth in turnover. Its contribution to the EBIT growth was SGD5.4m (c.46% of the total increase). EBIT margin improved y-o-y to 11.3%, from 10.9% in 1Q18.

Continuing Improvements in Margin Will Require More Acquisitions

  • ComfortDelGro should see margin improvements this year, as it consolidates recent acquisitions that came with higher margins. However, its existing businesses could still see margin pressure from higher competition and unfavourable FX (eg bus business in the UK).
  • In order to sustain its margin expansion, the group will need to continue acquiring new businesses that offer higher margins. While such a scenario is plausible, we believe ComfortDelGro will prefer to first focus on consolidating its newly-acquired businesses.

Turning Cautions on Taxi Business

  • ComfortDelGro has changed its revenue guidance for the taxi business to “decrease” from “maintain”, amidst weak operations in China.
  • ComfortDelGro also remains cognisant of a likely increase in competition from ride-hailing players in Singapore. The idle rate for its Singapore taxi fleet has increased to 3.7%, offset by higher rentals from the replacement of older Sonata taxis with new hybrid cars.
  • We believe ComfortDelGro will be cautious, with its launch of dynamic pricing and opening up of its mobile platform to ride-hailing drivers, as it will have to offer higher incentives to get ride-hailing drivers to join them. There also exists a risk of upsetting its taxi drivers, if the latter perceives that more bookings are being assigned to ride-hailing drivers.
  • During its previous results briefing (see report: ComfortDelGro - RHB Invest 2019-02-14: Where’s The Taxi Competition? Raise To BUY), ComfortDelGro had suggested that it would be comfortable with a net gearing of 30%, if it had to undertake a major acquisition. At 30% in net gearing, ComfortDelGro could get access to SGD800m of funding. This compares with SGD479m worth of acquisitions it undertook in 2018.
  • Management also did not write off the possibility of proposing higher dividends, if it does not foresee an immediate need for cash to undertake acquisitions. See ComfortDelGro's dividend history.

Source: RHB Invest Research - 15 May 2019

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