Highlights

ComfortDelGro - Bright Spots to Take Comfort in

Date: 14/10/2019

Source  :  UOB KayHian
Stock  :  ComfortDelGro       Price Target  :  2.95      |      Price Call  :  BUY
        Last Price  :  2.39      |      Upside/Downside  :  +0.56 (23.43%)
 


  • Public transport fare hikes are a positive for SBS Transit (SGX:S61)’s rail operations, which is currently operating at a loss. The overall fare adjustment of 7% translates to a net increase of about S$17m in annual revenue for the rail operations. While the taxi fleet’s decline is a headwind, management noted some bright spots, such as a recent decrease in driver incentives for Grab.
  • Maintain BUY with a target price of S$2.95.

What’s New

Fare hike approval by authorities.

  • The Public Transport Council (PTC) has granted a fare adjustment of a maximum allowable 7% increment following its annual fare review. According to the PTC, based on a 10km average journey fare, adult fares will rise from S$1.39 to S$1.48.
  • The authorities have also noted that monthly public transport expenditure as a percentage of household income for those in the second quintile household income group has dropped from 2.7% in 2008 to 1.7% (in 2018) over the past 10 years.

Increment a positive for rail operations.

  • The overall fare adjustment of 7% translates to a net increase (including contribution to Public Transport Fund) of about S$17m in annual revenue for SBS Transit Rail, in which the rail division has lost “tens of millions” in the recent financial year.
  • Management noted that assuming status quo (eg. no fare decrease in subsequent years), this will aid in lowering the initial breakeven guidance of 650,000 daily ridership for the Downtown Line (DTL).

Taxi fleet decline still a concern; competition remains but there are some bright spots.

  • The sharper decline in ComfortDelGro (SGX:C52)'s taxi fleet is a prevailing concern, with Jul 19 fleet size of about 11,200 down about 11% y-o-y. Management intends to remain relevant in the taxi industry, attempting to retain its fleet size which still has a sizeable presence. ComfortDelGro retains an advantage over its taxi peers with in-house maintenance of fleet as well as a wide coverage of location for fuel sales.
  • According to ComfortDelGro, its drivers’ earnings remain decent and its overall suite of solutions will be essential in retaining drivers. Competition with private hires remains in flux though management noted that Grab’s driver incentives have seen a slight reduction recently while overseas taxis in Tier 2 cities (Aberdeen, Liverpool) are doing well.

Further acquisitions still possible; Aussie operations to continue integration.

  • ComfortDelGro noted a preference for operator-based transport businesses when on the lookout for potential acquisition.
  • On the Australian front, the group has recently appointed a new country head which will look to further integrate its broad-based operations in the region.

Stock Impact

Much needed boost for rail operations.

  • Fare hikes will not impact SBS Transit’s bus operations given that it is on the bus contracting model. For the North East Line (NEL) under the “cap and collar” model with a cap on its operating profits, this might limit the effects of a larger fare revenue.
  • As for the DTL, assuming it entails 40% of SBS Transit’s ridership proportion and fare revenue, the fare hike can help alleviate its loss making position by an estimated $$7m-8m, translating to approximately 2% of ComfortDelGro’s 2020 profits.
  • See SBS Transit share price; SBS Transit dividend history.
  • See also ComfortDelGro share price; ComfortDelGro dividend history.

Earnings Revision / Risk

No changes to earnings forecasts.

  • We have elected to maintain our earnings forecasts given potentially higher maintenance costs of the NEL, which is currently in its mid-life cycle.

Valuation / Recommendation

  • Maintain BUY with an unchanged target price of S$2.95, pegged to 19.5x 2020F PE, or 1SD above its forward mean PE.
  • We think ComfortDelGro’s longer-term growth prospects will be well sustained through public transport initiatives.

Share Price Catalyst

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

Source: UOB Kay Hian Research - 14 Oct 2019

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