• Stay NEUTRAL with a new DCF-based SGD2.55 Target Price from SGD2.65, 3% downside with 3.8% yield.
• COMFORTDELGRO (SGX:C52)’s 1H19 PATMI was below our and consensus forecasts. We drop 2019-2021 estimates 3.5-6% to account for higher operating costs and lower revenue from taxi business.
• While we like the defensive nature of ComfortDelGro’s public transport earnings and strong FCF generation capability, the stock looks fairly priced – trading at 18.7x 2019F P/E (5-year average: 15x).

2Q19 Results Were Below Expectations

• COMFORTDELGRO (SGX:C52) reported 2Q19 PATMI of SGD75.pm (+1.2% y-o-y). 1H19 PATMI of SGD146.3m accounted for 45% of our and consensus’ 2019 estimates.
• Excluding the negative FX impact, new acquisitions accounted for 80% of the growth in revenue. Its contribution to the EBIT growth was SGD8.4m. EBIT contribution from existing businesses was a negative SGD0.8m.
• ComfortDelGro announced an interim dividend of 4.5 cents, which implies a payout ratio of 67%.

Public Transport to Witness Elevated Costs

• Near-term revenue growth will be driven by higher bus and rail revenue from Singapore and contributions from acquisitions undertaken in Australia. However, ComfortDelGro expects significant cost pressures in the public transport business. This will be from higher operating and maintenance costs related to mid-life refurbishments to be undertaken at the North East Line.
• Nevertheless, further upside to this division could come from a reduction in rail losses amidst higher transport fares and improved synergies for its acquired businesses.

Taxi Unit: Still Under Pressure

• Declining taxi fleet, loss of drivers to ride-hailing players, a rise in fleet idle rate to 4% from 2.5%, and delays in replacing older taxis with newer hybrid cars led to a SGD15.2m decline in 2Q19 revenue. Most of the decline came from Singapore operations. EBIT for the taxi business fell SGD2.5m y-o-y.
• ComfortDelGro still has 900 Hyundai Sonata taxis to be replaced. The replacement of its old taxis with hybrids will enable the company to boost its rental rate and offset some revenue loss from the declining fleet size. ComfortDelGro could forgo some margins by offering higher incentives to retain drivers. It expects to end the year with a slightly lower taxi fleet size.

Slowing Growth and Stretched Valuations Support Our NEUTRAL Rating

• We maintain that ComfortDelGro’s public transport business should be its key earnings growth driver in the near term. After outperforming the STI 19% YTD, the firm’s forward P/E close to +2SD from its 5-year average. See ComfortDelGro's share price.
• Key upside risk: Additional earnings-accretive acquisitions.
• Downside risks: Increased competition from ride-hailing players and decline in margins for its businesses.

Source: RHB Invest Research - 14 Aug 2019