ComfortDelGro - Look Beyond Near-Term Weakness; BUY

Date: 02/07/2020

Source  :  RHB
Stock  :  ComfortDelGro       Price Target  :  1.65      |      Price Call  :  BUY
        Last Price  :  1.39      |      Upside/Downside  :  +0.26 (18.71%)

  • ComfortDelGro's share price reacted negatively after it announced expectations of a 1H20 loss and extended the 50% taxi rental waiver until 15 Jul. Even if there is a more gradual reopening of Singapore’s economy, we believe ComfortDelGro (SGX:C52) should report q-o-q profit improvement as we get to the end of 2020, and strong earnings growth in 2021.
  • With its forward P/E below the historical average, we maintain that investors should use the current price weakness to accumulate the stock.
  • Reiterate BUY with SGD1.65 Target Price, 12% upside and 5% 2021F yield.

Negative Share Price Reaction to Profit Warning Should Now be Behind Us

  • Last week, ComfortDelGro announced that it expects to report a 1H20 net loss. While COVID-19’s negative impact on its business was expected, the possibility of impairment in its investments caught investors by surprise. We will know more about the impairment when the company announces its 1H20 results by 15 Aug.
  • Nevertheless, we lower our 2020 profit expectations by 13%, and our estimates are now close to Street’s. Despite the impairment risk, ComfortDelGro continues to be well-funded and could still undertake an earnings accretive acquisition – should an opportunity arise.
  • As at end-1Q20, ComfortDelGro had a SGD26m net cash balance, with access to an additional SGD700m worth of facilities.

ComfortDelGro Announced Plans to Extend the 50% Taxi Rental Waiver

  • Earlier this week, ComfortDelGro announced plans to extend the 50% taxi rental waiver until 15 Jul to support taxi drivers’ earnings as the economy moves towards a more gradual return to normalcy. We think there is a likelihood of ComfortDelGro extending the waiver again, as it looks to maintain its leadership in Singapore’s taxi business, and arrest the taxi fleet size decline.
  • ComfortDelGro's taxi fleet declined by 4% in 2020 to 10,282 by end-Apr. Our estimates for taxi revenue in 2020 already factors-in a much higher reduction in its fleet size.

Beyond 2020, ComfortDelGro Seems Set to Deliver Strong Growth

  • As we get closer to the end of 2020, a gradual recovery in ridership for ComfortDelGro’s public transport business, and stabilisation of its taxi business should support strong earnings growth in 2021.
  • We expect ComfortDelGro to deliver 40% profit growth next year. Street is more optimistic than us about ComfortDelGro’s 2021 earnings. Based on its most bearish 2020 estimates, Street expects ComfortDelGro to deliver close to 100% earnings growth in 2021.

In Addition to Growth, Below-average Valuation and Reasonable Yield Support Our Rating

  • Our DCF-based SGD1.65 Target Price implies 16x 2021F P/E, which is marginally higher than the stock’s 10-year 15.5x average P/E. Given the strong growth expectations, we believe ComfortDelGro should trade at a much higher P/E multiple.
  • Barring risks of a second wave of COVID-19 infections, we believe ComfortDelGro's share price provides a good entry point for investors to accumulate the stock.

Source: RHB Invest Research - 2 Jul 2020

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ComfortDelGro 1.39 -0.02 (1.42%) 10,119 

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