Highlights

ComfortDelGro - Positives From Regulatory Changes

Date: 10/07/2019

Source  :  UOB KayHian
Stock  :  ComfortDelGro       Price Target  :  3.08      |      Price Call  :  BUY
        Last Price  :  2.36      |      Upside/Downside  :  +0.72 (30.51%)
 


  • Proposed regulatory changes were discussed recently and are largely positive for ComfortDelGro (SGX:C52)’s lagging business units: Singapore rail and taxis. The temporary grant for rail could lift the loss-making DTL while a private hire licensing law could further diminish competition.
  • We raise our PE valuation multiple to 19.5x (FY20F), 1SD above its mean, given operating profits are close to the highs seen in 2015-16 (average PE: 20x). Maintain BUY with a higher target price of S$3.08.

What’s New

Review of transport fare formula to reflect rising rail costs; temporary grant support.

  • The Transport Minister noted that there may be a need to review transport fares due to the rising costs of Singapore’s rail system. It was observed that the Public Transport Council (PTC) would need to review the fare adjustment mechanism given higher operating costs to support the intensified maintenance works.
  • In the meantime, a temporary grant will be provided to support rail operators.

Proposed bill to regulate private hire operators.

  • A new bill was also tabled in parliament, seeking to regulate the private-hire car industry with a new ride hail service license. The bill will give the PTC discretion in setting the pricing policy for fares charged by ride hailing operators Grab and Gojek.
  • Private hire operators may have to fix the components of ride-hail fares as well as the maximum or minimum price range. There may also be a fixed maximum or minimum number of authorised drivers with the respective operators. The bill will be debated next month.

Stock Impact

Temporary rail grant an uplift for loss-making DTL.

  • We that the PTC’s current formula still until 2023 hence any to raise fare charges take time see effect. With the temporary, could provide a potential for the loss-making Downtown. We had in our “ComfortDelGro Corporation - UOB Kay Hian 2019-03-22: In Anticipation Of A Smoother Ride’ sensitivity to our, given a in margins DTL.
  • To recap, under the new rail financing framework, the North East Line (NEL) operates on a cap and collar approach, with the “collar” for EBIT margin at 3.5%, while SMRT aims for an EBIT margin of 5%. Given the DTL’s shorter operating history, we think the grant may not be as substantial yet. Our base case assumes a -10% operating margin loss for 2020. An estimated S$15m uplift would allow for breakeven for the rail line.

Private hire bill to level playing field.

  • The proposed been expected given that the had released a paper and a feedback earlier this. We deem that the proposed will the of private and competition with to some extent. For example, the of a ride-hail pricing might that hires fares become, with reduced to win over share.
  • Nevertheless, we are still cautious of the decline in taxi fleet, which has seen a slight dip in Apr and May 19.

Earnings Revision / Risk

  • No changes to earnings forecasts.

Valuation / Recommendation

  • Maintain BUY with a higher PE-based target price of S$3.08, pegged to 19.5x (previously 17.5x) 2020F PE, based on 1SD above its forward mean PE.
  • We think this is reasonable, given that the ComfortDelGro has seen a recovery in operating profits (with help from the public transport segment’s contribution and recent acquisitions) to levels seen in 2015-16, before the period of intense competition with private hires in 2017-18. We also note that the mean PE seen during 2015-16 is 20.0x, close to our pegged multiple.
  • The public transport segment now contributes 50% of operating profit in FY18 vs 38% in FY15, and has largely offset the decline in contribution from the taxi segment. Current ComfortDelGro share price reflects a dividend yield of 4.0%, with long-term growth prospects sustained through public transport initiatives. See ComfortDelGro's dividends history.

Share Price Catalyst

  • More earnings-accretive and aggressive overseas acquisitions.
  • Regulation changes in taxi and public transport.

Source: UOB Kay Hian Research - 10 Jul 2019

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