In Line 2Q19. Maintain HOLD

• COMFORTDELGRO CORPORATION LTD (SGX:C52)’s 2Q19 core net profit was in line with our/consensus estimates at 24% of FY19E, as well as 1H19 at 48%/45%. As expected, public transport services continued to lead growth, while Singapore taxi remains under competitive pressure.
• We maintain our forecasts, DCF-based Target Price of SGD2.76 (WACC 9.0%, LTG 1%) and HOLD.
• Several factors will determine the outlook for ComfortDelGro. These include:
  1. the final form and quantum of fare hikes and/or grants;
  2. the level of competition in the taxi industry; and
  3. overseas acquisitions.

Well-known Theme Is Playing Out

• ComfortDelGro's 2Q19 consolidated revenue growth of 4% q-o-q and y-o-y continued to be driven by public transport services due to Singapore rail fare hikes and the contribution from overseas acquisitions. This offset the increased competitive pressure in the Singapore taxi segment where fleet right sizing continues with driver defections to private hire operators.
• The same situation is reflected in EBIT growth trends but a bright spot was a q-o-q and y-o-y margin rebound for taxis. The full-year impact of 2018 acquisitions drives our expectation of a stronger 2H19.

Prudently Cautious 2H?

• Management remained cautious of a potential increase in competitive intensity in Singapore’s taxi market. But there is room for ComfortDelGro to accept lower margins to boost driver retention rates in order to maximize its fleet. It is likewise uncertain whether the government will increase fixed charges for Singapore rail.
• We forecast FY19 EBIT margin to decline to 11.3% from 11.5% in FY18. As of 1H19, EBIT margin is running ahead at 11.5%.

Regulatory Cost Reform and Acquisition Potential

• Management did not confirm reports that claim it is interested in purchasing assets being offered by unlisted Arriva.
• Likewise, management indicated there has yet to be any follow up to indications from the Transport Minister of potential cost recovery reforms for Singapore rail.

Source: Maybank Kim Eng Research - 14 Aug 2019