• Limited impact from weaker GBP
• Taxi earnings still resilient
• Attractive price levels to BUY

Unlikely to see significant drop in earnings due to Brexit

Global financial markets were thrown into turmoil last Friday on increased uncertainty over global economic outlook after 51.9% of the British voters voted for the United Kingdom to leave the European Union. As a result, the GBP depreciated 9.3% against the SGD to settle at 1.8060 on 28 Jun.

Based on FY15/1Q16 results, UK/Ireland formed 20.5%/16.5% of ComfortDelGro’s (CDG) total operating profit. Going forward, assuming CDG’s exposure to UK/Ireland remains within the range of 16.5%- 20.5%, a 10% depreciation in GBP against SGD is estimated to result in a 1.7%-2.1% decline in its total operating profit.

Hence, in our view, the impact of a depreciating GBP against SGD on CDG’s earnings is limited based on its exposure to UK/Ireland businesses, unless we see a further plunge of more than 10% in the GBP against the SGD.

Threat over taxi business may be overblown

Another area of concern is the threat of private hire car services (e.g. GrabCar and UberX etc) on CDG’s taxi business, of which Singapore contributes the majority of CDG’s taxi revenue. The concerns were certainly not without merits since taxi business formed 36.4%/35.2% of CDG’s total FY15/1Q16 operating profit. Management also highlighted that waiting queue for taxi rental fell from an average of two weeks to none as at 1Q16.

That said, we note that CDG’s taxi hire-out rate was maintained at ~100% as at end-1Q16. With more than 90% of taxi revenue derived from taxi rental income, we believe CDG’s earnings will continue to be resilient as long as CDG put in efforts to maintain hire-out rate at ~100%. While we think taxi earnings growth may slow due to controlled slowdown in fleet growth, we do not expect a material fall in taxi contributions as a result of private hire car services.

Maintain BUY

At the current price levels, we think market has overpriced-in the potential impacts from both Brexit and threat of private hire car services. Hence, reiterate BUY on CDG with an unchanged S$3.40 FV.

Source: OCBC Research - 29 Jun 2016