Reduced Margin Assumptions. Maintain BUY

• We reduce our 2019E-21E profit forecasts by 2-3% to reflect higher rail fees in 3Q19 that reduced public transport margins. Our DCF-based (WACC 9.0%, LTG 1%) Target Price is consequently reduced by 2% to SGD2.70.
• An approved 2020 fare hike and improved overseas diversification remain key catalysts behind our BUY.
• Worse-than-expected taxi business erosion and/or fare hike reversals is the downside risk to our outlook.

Slight Miss on 3Q19, But Impact Exaggerated

• After the 3Q19 miss, COMFORTDELGRO (SGX:C52)'s 9M19 profit reached only 72%/70% of MKE/consensus FY19E. It’s running slightly behind forecasts due to a 54% q-o-q (SGD12m) increase in other opex in 3Q19 that management primarily attributed to retroactive adjustments for regulatory rail fees. This resulted in 3Q19 profit being down 11% y-o-y and 8% q-o-q.
• ComfortDelGro's 9M19 revenue at 72%/74% of MKE/consensus was on track as 4Q is seasonally the strongest revenue quarter. We maintain our revenue forecasts but reduced our FY19E-21E EBIT margin forecasts by 20-30bps to account for the higher rail fee impact.

Taxi Under Pressure But Not as Bad as Expected

• Taxi fleet and market share losses continued in 3Q19 but 9M19 taxi EBIT margin at 17.0% remained higher than our FY19 estimate of 16.8%. With a recent, 3- to 24-month rental rebate programme locking in over 70% of the driver force, taxi margins should fall closer to our FY.
• We currently assume another 50bps drop in taxi margin in FY20E. Management remains cautious of the competitive environment but noted that the rate of fleet and driver decline is not as severe as in the past.

Growth From Public Transport Services

• Despite margin pressure, we continue to anticipate EBIT and profit growth to be driven by public transport service (bus and rail) revenues. This will come from a combination of local fare hikes and improvements in existing overseas ventures.

Source: Maybank Kim Eng Research - 14 Nov 2019