ComfortDelGro - Bumpy Ride, BUY on Dips

Date: 28/06/2020

Source  :  Maybank Kim Eng
Stock  :  ComfortDelGro       Price Target  :  1.98      |      Price Call  :  BUY
        Last Price  :  1.39      |      Upside/Downside  :  +0.59 (42.45%)

1HFY20 Net Loss, as Expected; BUY on Weakness

  • ComfortDelGro (SGX:C52) issued a profit warning.
  • ComfortDelGro's 1HFY20 losses were likely due to impairment in its taxi division. We had already factored in operation weakness into our forecasts. Structural growth is intact, while ComfortDelGro remains a key beneficiary from rising ridership as Singapore emerges from the lockdown.
  • Maintain DCF-based SGD1.98 Target Price.
  • 2QFY20 results in mid-Aug.
  • Downside risk: negative operating leverage.

ComfortDelGro Issued Profit Warning

  • ComfortDelGro is expecting a 1HFY20 net loss due to:
    1. significant impact of Covid-19 on its operating regions; and
    2. the possibility of impairment of investments in certain local and overseas subsidiaries.
  • We think impairment could come from its taxi business, which is bearing the brunt of Covid-19. This was expected and we have built in substantial weakness in our FY20E taxi EBIT.
  • Going forward, we do not expect further material rental reliefs for taxis given Singapore’s Phase 2 re-opening.

Impairment Could be From Taxi Business

  • ComfortDelGro did not indicate which division is subject to impairment but we think it is likely the taxi business from COVID-19 pressure and idle fleets. The Group took an earlier impairment charge of SGD27.3m in FY19 for taxis in Singapore and China given competition from private-hire players. This was 0.5% of FY19 total assets. A similar charge off now would imply an impairment of SGD26.2m – a 17% downside to our FY20E EPS.

Losses for Taxi Division Factored in

  • ComfortDelGro had already previously warned that its taxi division could face losses since Mar-20 due to the substantial amount of taxi rental reliefs (~SGD117m) given to taxi drivers amid Covid-19. We have already built such weakness into our model.
  • We expect taxi EBIT margin to drop sharply to 2% in FY20E, from 15.6% in FY19. But with Singapore’s Phase 2 re-opening since 1 June, we do not expect further substantial rental rebates going forward, which may offset some of the downside from impairment charges.

Structural Growth and Recovery Play Unchanged

  • We believe investors should BUY on price weakness as ComfortDelGro continues to focus on expanding its stable, non-volatile bus contracting model, which accounted for 63% of FY19 revenue. Meanwhile, as mentioned, ComfortDelGro will be a key beneficiary as economic activities resume in Singapore.
  • Even with an impairment charge of SGD26.2m, our conservative FY20E DPS of SGD0.043 (based on 60% payout ratio vs 73% 5-year average) is still well supported by FCF.

Source: Maybank Kim Eng Research - 28 Jun 2020

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ComfortDelGro 1.39 -0.02 (1.42%) 10,119 

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