• COMFORTDELGRO (SGX:C52)'s 1H19 net profit rose 3.5% y-o-y to S$146m, slightly below our and consensus expectations. Singapore taxi and weaker £ and A$ were the main drags.
• FY19-21F EPS cut by 1.95-3.7% to reflect weakness in the taxi segment; strength in public transport services support overall growth outlook.
• This note marks a transfer in analyst coverage. We continue to like ComfortDelGro for its stable long-term income streams.
• Maintain ADD with lower Target Price of S$2.78.

Generally Decent Results, Capped by Weaker Taxi Segment

• ComfortDelGro's 1H19 revenue/EBIT grew 5.9%/3.5% y-o-y mainly led by robust gains in the public transport segment, with new acquisitions contributing S$13.7m to EBIT. But could have been better if the weaker £ and A$ had not capped its public transport services earnings.
• 1H19 EBIT margin improved slightly to 11.5% (vs. 11.3% in 1H18).
• An interim dividend of 4.5Scts was announced (unchanged 66% payout). See ComfortDelGro's dividend history.

Public Transport Services Continue to Drive Growth Ahead

• Its public transport business saw 22.2% growth in 1H19 operating profit (S$118m), driven by
  1. higher SBS Transit (SGX:S61) mileage;
  2. contributions from Australian acquisitions made last year; and
  3. and rail revenue following a 4.3% fare adjustment effective Dec 2018.
• If not for weaker £ and A$, revenue would be higher. ComfortDelGro maintains a positive revenue growth outlook for both its Singapore and Australian operations.

Taxi Competition Heats Up

• ComfortDelGro's 1H19 taxi operating profit declined 7.1% y-o-y to S$58m (1H18: S$62m) as a result of weaker Singapore taxi performance.
• Management said competition for drivers from ride-hailing firms heated up in 2Q19. Ride-hailing firms were likely gearing up ahead of passing of the new Point-to-Point (2P) Passenger Transport Industry Bill, in our view. ComfortDelGro guided for negative revenue growth for the segment in 2H19F. However, we believe the new regulatory framework will indirectly benefit ComfortDelGro in the longer term.

M&As on the Horizon?

• Management said it is always on the look-out for M&As but is cognisant of the targets' returns and country risks (e.g. strength of labour unions). It reiterated it has plenty of debt headroom to fund acquisitions (still comfortable with 30% net gearing cap). In the interim, it will prioritise the integration of acquired Australian bus business, which has boosted its public transport services segment revenue.
• With regards to a Bloomberg article that ComfortDelGro has made a bid for Arriva's assets, we believe Arriva's London Bus asset could be most complementary to ComfortDelGro’s London bus segment (see overleaf).

Longer-term Play; Maintain ADD

• We cut FY19-21F EPS by 1.9-3.7% to reflect lower taxi EBIT. Near-term volatilities in the taxi business and forex aside, we like ComfortDelGro for its business model which is mainly led by a stable public transport business.
• Our DCF-based Target Price dips to S$2.78 (WACC: 7.6%; LTG: 2%), implying total return of 10% (6.1% share price upside, 4.4% dividend yield).
• Better taxi earnings and forex are potential re-rating catalysts.
• Downside risks: intensifying competition for its taxi business and worse-than-expected public service EBIT.

Source: CGS-CIMB Research - 14 Aug 2019