• Reiterate NEUTRAL and SGD2.55 Target Price, 4% upside.
• While contribution from acquisitions and organic growth in ComfortDelGro’s public transport business should drive earnings, we remain cautious in the near term amidst weakening metrics for its taxi business, and the expected increase in operating costs for the rail business.
• A sustainable 4% dividend yield should provide support ComfortDelGro share price. Trading at 17.1x 2020F P/E (5-year average: 15x), the stock looks fairly priced.

Taxi Business to Remain a Near-term Drag

• Based on data provided by the Land Transport Authority (LTA), ComfortDelGro’s taxi fleet has declined by 9.4% during the first seven months of 2019 to 11,200. This, along with loss of drivers to ride-hailing players, have pushed the idle rate for the company’s Singapore taxi fleet to 4% from 2.5%. Management guided that the replacement of older Hyundai Sonata taxis with hybrid cars, which has helped in offsetting some weakness from declining fleet size, is also being delayed due to a supply shortage.
• We expect competitive pressure in the taxi business to persist, given the increase in private car rental fleets in Singapore. ComfortDelGro could forgo some EBIT margin in its taxi business (17.8% EBIT margin in 2Q19) by offering higher incentives to retain drivers. It also expects to end the year with a slightly lower taxi fleet size. Taxi business accounted for 35% of operating profit in 2018.

Headwinds for Public Transport Business

• New bus contracts in Singapore (Seletar and Bukit Merah packages), acquisitions, and lower losses from its rail business (amidst an increase in fares) have been driving growth for the public transport business. Earlier this month, Singapore’s Public Transport Council noted that fares could increase by up to 7% as a part of the 2019 fare review exercise (news). While this may assist in improving the profitability of rail operations, we believe that the positive impact could get partially negated by expected cost increases.
• ComfortDelGro expects cost pressures in the coming quarters due to higher maintenance costs related to mid-life refurbishments to be undertaken at the North-East Line.

Upside Potential From Acquisitions and Turnaround of Rail Business

• ComfortDelGro undertook SGD479m worth of acquisitions in 2018. New acquisitions, which have been earnings accretive, offer EBIT margins that are higher than that of its existing businesses. At a net gearing of 30%, ComfortDelGro should have access to SGD800m of funding to support further acquisitions of earnings-accretive businesses.
• A further upside could also come from the turnaround of its rail business, especially the Downtown Line, which has lost SGD125m in last three years (news).

Source: RHB Invest Research - 19 Sep 2019