ComfortDelGro - 1H20 Looking Past the Worst

Date: 17/08/2020

Source  :  UOB KayHian
Stock  :  ComfortDelGro       Price Target  :  1.78      |      Price Call  :  BUY
        Last Price  :  1.39      |      Upside/Downside  :  +0.39 (28.06%)

  • ComfortDelGro’s headline loss of S$6m for 1H20 was largely expected due to Circuit Breaker restrictions as well as impairments. Public transport saw the worst effect from reduced ridership as well as lower bus service fees.
  • Looking ahead, busier taxis are a positive as rental waivers get progressively reduced. Although management remains cautious on the rate of recovery in rail ridership, we like the positive trend of recovery.
  • Maintain BUY with a slightly lower PE-based target price of S$1.78.

ComfortDelGro's 1H20 Results

1H20 headline loss came in at S$6m, affected by impairments and Circuit Breaker restrictions.

  • ComfortDelGro (SGX:C52) reported 1H20 headline net loss, with no interim dividend declared. We note that 1H20 headline earnings would have come in at a loss of S$66m without government relief. 1H20 adjusted earnings (excluding impairments) is S$25m (-83% y-o-y) and accounts for 16% of our full-year estimates. While the headline losses were not a surprise, adjusted profits came in below our expectations.

A helping hand from government relief.

  • ComfortDelGro's 2Q20 revenue dipped to a low of S$664m (- 32% y-o-y, -23% q-o-q). Government relief was recorded in most jurisdictions though the bulk of it was aided by the Jobs Support Scheme, which will continue in the near term for 2H20. An impairment of vehicles and goodwill was recorded, in relation to taxi in Singapore and goodwill in Australia.
  • Management noted that older diesel taxis are at a higher risk, given their lower earnings potential. Further impairment provisions are a considerable risk, in our opinion, as current provisions do not consider a second lockdown or a deterioration of present conditions.

Gradual but positive signs for public transport.

  • Revenue was expectedly down to S$571m (-21% y-o-y, -13% q-o-q) in 2Q20 on the back of reduced ridership during the Circuit Breaker as well as lower service fee from the buses due to lower fuel indexation and operated mileage. This was partially offset by higher average fare.
  • For 1H20, average daily ridership for the Downtown Line (DTL) dropped by 46% y-o-y to 253,000 passenger trips while average daily ridership for North-East Line (NEL) dropped by 44% to 332,000 passenger trips. Management noted that rail ridership is at 50% of pre-COVID levels as of end-Jul 20, slightly slower than expected. We are encouraged by the gradual recovery in ridership, as well as overseas buses, such as Metroline, which have resumed normal service levels in Aug 20.

Busier taxis.

  • Management noted that taxis have been taking on more rides recently, while attrition rates of drivers have stabilised compared to during the Circuit Breaker period. Drivers’ earnings, supported by the self-employed government grant, have been broadly up. Rental waivers are slowly being eased by the group.
  • Since full rental waivers during the Circuit Breaker period, waivers have eased progressively (June to mid-July: 50%; mid-July to mid-August: 40%; mid-August onwards: 30%).

Remain Optimistic for Singapore

  • Barring another round of stay-home measures, we opine that the recovery in public transit has been encouraging. Phase 2 reopening continues to be in place with lower ridership, though it has passed the lows experienced in Apr 20. Average daily taxi rides have recovered in Jun 20, up approximately 40-50% m-o-m, according to the Land Transport Authority, while being down only 30-35% y-o-y.
  • While the group noted that with 30% taxi rental waivers, the taxi segment would still not be operating at a profitable level, we expect the waivers to be progressively reduced, and inch the segment to operating breakeven closer towards the end of the year.

Cut ComfortDelGro's 2020 Earnings by 13%; Trim 2021-22 Earnings by 2-5%

  • We factor slightly more conservative rates of ridership recovery for public transport, whilst also accounting for Australia’s second wave of COVID-19 restrictions. Our current assumption assumes average ridership of 50-70% pre-COVID-19 levels in 2H20, and 70-80% of pre-COVID-19 levels in 1H21.
  • Key risks include further impairment charges, a second wave of COVID-19 restrictions.

ComfortDelGro's Valuation & Recommendation

  • Maintain BUY on ComfortDelGro with a target price of S$1.78, pegged to 17.2x (previously 16.7x) PE (long-term forward mean PE, excluding outliers) for 2021F earnings.
  • We deem that the current ComfortDelGro's share price has largely factored in weakness of transport services for 2020. ComfortDelGro currently trades at an attractive 14x 2021F PE with recovery set in place.
  • ComfortDelGro's share price catalyst:
    • Easing of stay-home measures.
    • Bus tender contract wins.
    • Earnings-accretive overseas acquisitions.
    • Regulatory changes in public transport.

Source: UOB Kay Hian Research - 17 Aug 2020

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