• Upgrade to NEUTRAL, SGD2.65 Target Price, 3% upside with 4% yield.
• We remain confident over ComfortDelGro (SGX:C52)’s earnings growth recovery, aided by contributions from recent acquisitions and its public transport unit’s growth. The stock looks fairly priced now, ie trading at 17.3x 2019 P/E (5-year average: 15x). See ComfortDelGro's share price.
• While we like the defensive nature of its earnings, investors should consider buying at a lower price (SGD2.40). Increased competition in the taxi business present downside risks, while earnings-accretive acquisitions offer upside risks.

Public Transport Remains the Key Earnings Drivers

• We maintain that ComfortDelGro’s public transport business will be its key earnings growth driver in the near term, aided by organic growth in Singapore and contributions from acquisitions undertaken in 2018.
• Based on its latest quarterly results, ComfortDelGro’s public transport business accounts for 70% of revenue and 50% of EBIT. In addition to organic growth from its bus operations in Singapore, the reduction of losses for its rail business, which has witnessed an increase in ridership and higher average fares, should also support earnings growth for its public transport business in Singapore.

Downside Risk as Taxi Fleet Continues to Contract

• During its recent quarterly results announcement, ComfortDelGro lowered its revenue guidance for the taxi business to “decrease” from “maintain”, amidst weak operations in China and expectations of growing competition from ride-hailing players in Singapore. While its taxi fleet idle rates have increased, management expects higher rentals from the replacement of older taxis with new hybrid cars to offset some of the revenue decline.
• We believe that the continuing decline in taxi fleet size, as evident from latest industry statistics, could pose as a downside risk to ComfortDelGro’s taxi earnings, which account for 30% of its EBIT.

New Acquisitions Are Potential Re-rating Catalysts

• ComfortDelGro undertook SGD479m worth of 30%, a level that management is comfortable with, ComfortDelGro would have access to SGD800m of funding to support further acquisitions of earnings-accretive businesses.

Maintain Forecasts; Our Estimates Slightly Ahead of Street Projections

• ComfortDelGro's share price has outperformed the STI by the Street’s.
• Barring downside revisions to earnings, we note that its 4% dividend yield – which we believe is sustainable – should provide downside protection to its share price. See ComfortDelGro's dividend history.
• Key upside risks are additional earnings-accretive acquisitions and a pause in its taxi fleet contraction.
• Downside risks are increased in margins for existing businesses.

Source: RHB Invest Research - 18 Jun 2019