• TAKE PROFIT, SGD2.65 Target Price, 2% upside with 4% FY19F yield.
• We remain positive on ComfortDelGro’s growth in the public transportation business, profit contributions from new acquisitions and likely improvement in taxi earnings amidst a lack of competition from ride-hailing players. However, after delivering +21% YTD returns, ComfortDelGro – now trading at 17.3x 2019 P/E (5- year average of 15.4x) – seems fairly priced.
• Investors could consider buying ComfortDelGro again, if the share price drops below SGD2.50.
• Additional earnings-accretive acquisitions offer upside risks. 

Continue to Like Earnings Growth From Public Transport Business

• Despite continued losses at its rail business, we believe COMFORTDELGRO CORPORATION LTD (SGX:C52)’s public transport business will continue to be the key growth driver in the near term – thanks to organic growth in Singapore and contributions from acquisitions undertaken in Australia. ComfortDelGro’s public transport business accounts for 70% of revenue and 40% of EBIT.
• While EBIT margins have been on a decline in Australia, ComfortDelGro highlighted that new acquisitions offer margins that are higher than the group’s consolidated EBIT margins of 12-13%.
• With negligible downside risk for its bus business in Singapore, the reduction in losses from its rail business could support higher earnings growth over the next 2-3 years. 

Renewal of Fleet Should Support Recovery in Taxi Business

• ComfortDelGro is looking to replace older diesel taxis with new hybrid ones, which fetch a higher average daily rental rate (c.SGD120) vs the taxis that are being phased out. This, we believe, should translate into improved taxi earnings – assuming no sharp rise in competition from ride-hailing players.
• Although Gojek has intensified efforts to gain market share and is offering higher incentives to drivers and discounts to passengers, we do not expect it to have a material impact on ComfortDelGro’s taxi business. 

Ample Debt Head Room Provides More Inorganic Growth Opportunities

• Strong operating cash flow generation has enabled ComfortDelGro to maintain a net cash balance sheet. However, management suggested that it would be comfortable with a net gearing of 30%, if it had to undertake a large earnings-accretive acquisition. At 30% net gearing, ComfortDelGro could get access to additional SGD780m of funding. This compares with SGD479m worth of acquisitions it undertook in 2018 

Stock Price Seems Fairly Priced, Upside Risk Exists

• We deem it difficult for ComfortDelGro to continue outperforming the STI, as the stock is trading above +1SD from its 5-year mean P/E of 15.4x. While its dividend yield of 4% is still above the 10-year bond yield of 2.1%, it has fallen a tad below the STI’s 4.1% dividend yield.
• While we moderate 2019-2021 earnings estimates to account for slower improvement in taxi earnings, we maintain that earnings-accretive acquisitions and higher-than-estimated improvements in its taxi business offer near-term upside risks. 

Source: RHB Invest Research - 03 Apr 2019