• We hosted an NDR for ComfortDelGro in Kuala Lumpur last week; investors’ concerns on the impact of ride-hailing services on ComfortDelGro’s taxi business were discussed.
• ComfortDelGro reaffirmed its strategy to seek growth via acquisitions, mainly in developed cities, and it has wide debt headroom (c.S$800m) to fund them.
• Maintain ADD with unchanged DCF-derived Target Price of S$2.74. Upside catalysts could come from further earnings-accretive M&A and taxi fleet expansion.

Still a Viable Long-term Growth Stock, in Our View

• We brought COMFORTDELGRO CORPORATION LTD (SGX:C52) to meet investors in Kuala Lumpur on 25 Feb 2019.
• Investors’ questions were mostly related to the outlook of the taxi business in Singapore, M&A opportunities in the pipeline, and ComfortDelGro's near-term earnings growth drivers.
• We believe ComfortDelGro remains a viable long-term growth stock, with its taxi business now on a more solid footing and its earnings growth to be mainly driven by its public transport services and M&A.

Concerns on Ride-hailing Disruption to Taxis Alleviated

• Investors concur with ComfortDelGro’s view that both Grab and Go-JEK may have shifted their key growth emphasis from ride-hailing to other businesses such as insurance and mobile payment, which would bode well for ComfortDelGro’s Singapore taxi business. Likewise, we think the likelihood of ride-hailing competition intensifying hereon is slim.
• We think taxi earnings upside could come from:
  1. continual fleet replacement with new hybrid models that fetch higher rental rates, and
  2. net expansion of its taxi fleet.

M&A Remain a Key Strategy to Drive Growth…

• In response to questions on whether ComfortDelGro would tone down its acquisition spree, ComfortDelGro reaffirmed that it would continue to seek growth through viable earnings-accretive acquisitions. It would probably be looking to extend its operating presence further in Australia due to a stable economic environment and good margins (in the teens) .
• Other key target markets for acquisitions would probably be urban cities in developed nations; ComfortDelGro prefers to obtain a controlling stake in the acquired entities.

…with Plenty of Debt Headroom to Fund Acquisitions

• As at end-Dec 2018, ComfortDelGro has S$16m in net cash. Its target cap of 30% net gearing implies that it could gear up by another S$800m to fund its acquisitions ahead.

Maintain Add

• We retain our ADD rating and our DCF-based Target Price of S$2.74 (WACC: 7.8%), which implies 17.5x FY20F P/E.
• ComfortDelGro is currently trading at 15.5x FY20F P/E, below its 7-year historical average (16.7x), along with FY19F dividend yield of 4.6%.
• An affirmed expansion of its taxi fleet in the coming months and further earnings-accretive M&A could re-rate the stock.
• Key risks to our call are stagnating/declining taxi fleet and weaker-than-expected contributions from its acquisitions.

Source: CGS-CIMB Research - 07 Mar 2019