• 9M16 PATMI met 75% of FY estimates
• Near-term pressure on rail
• Taxi earnings remain steady

3Q16 revenue fell mainly on weaker GBP against SGD

ComfortDelGro’s (CDG) 3Q16 earnings remained resilient despite a 3.1% YoY drop in revenue to S$1.02b, mainly eroded by weaker GBP against SGD. Without foreign currency (FX) effect, underlying revenue grew 1.5% mainly driven by rail and taxi segments. Note that while 3Q16 rail revenue grew 26.3% YoY, its operating profit fell 20.0% on start-up costs incurred in preparation for Downtown Line Phase 3 (DTL3).

3Q16 operating expenses fell 3.3% YoY to S$888.2m, mainly due to postive FX effect from weaker GBP against SGD. Consequently, 3Q16 PATMI grew 2.5% YoY to S$87.3m. Even as 9M16 revenue fell 0.5% YoY to S$3.0b, PATMI rose 5.2% to S$245.9m mainly due to decline in operating expenses driven by lower energy costs and lower materials and consumables costs, and met 75.1% of FY16 forecasts.

DTL3 start-up costs erodes NEL profitability

For rail segment, while we expect it to be the key revenue growth driver on higher ridership from DTL2, overall rail profitability will likely be affected as start-up costs for DTL3 continues to erode earnings from the North-East Line (NEL). With DTL3 slated to start nearer to Sep 17, we do not expect DTL to turn profitable before that. However, as we expect ridership to ramp up within a short time with 16 stations on DTL3 (the most among the three phases), we believe startup costs will be quickly absorbed, leading to margin recovery.

For taxi segment, as at end- 3Q16, CDG’s Singapore taxi fleet utilization rate remains high at 99% and we expect earnings to stay stable as CDG continues its fleet renewal programme. Management also noted they are making progress with respect to M&A activities, with discussions still on-going with its target.

Reiterate BUY on S$3.08 FV

As we factor in weaker rail profitability and cut FY16/17 PATMI by 1.2%/3.7%, our DCF-derived FV drops slightly from S$3.09 to S$3.08. Supported by a decent 3.8% forward dividend yield, reiterate BUY on CDG. With improved free cash flow outlook under new bus model, we do not rule out potentially higher dividend payout ratio in the future.

Source: OCBC Research - 14 Nov 2016