• Stay NEUTRAL with DCF-based SGD2.38 Target Price from SGD2.55, 0% upside with 4.2% yield.
• ComfortDelGro’s 9M19 PATMI was below our and consensus forecasts. We lower 2019-2021 estimates 6-10% to account for the incorporation of fixed licence charge payment related to the Downtown MRT Line and higher maintenance cost.
• While we like the defensive nature of ComfortDelGro’s public transport earnings and its strong FCF generation capability, the slower profit growth outlook and premium valuation support our Neutral rating.
• A healthy dividend yield should limit material downside to its share price.

3Q19 Results Were Below Expectation

• COMFORTDELGRO (SGX:C52)'s 9M19 profit of SGD216m accounted for 71% of our and 69% of consensus’ 2019 estimate. Excluding the negative FX impact, new acquisitions accounted for all of the growth in revenue.
• For existing businesses, public transport and taxi operations in Singapore witnessed a decline in revenue. All growth in operating profit accrued from new acquisitions. Negative EBIT contribution from existing businesses was attributed to a decline in taxi earnings and payment of fixed licence charge.

Public Transport to Witness Elevated Costs

• While near-term revenue growth will be driven by higher bus and rail revenue from Singapore and contributions from recently completed acquisitions, costs are also expected to remain elevated amidst higher maintenance expenditure accruing from its rail operations.
• Public transport margins are also expected to remain in check with the introduction of the fixed licence charge. The fixed licence charge of SGD15m for 2019 is expected to increase by SGD5m every year going forward.
• Despite improving ridership and 7% higher public transport fares, the Downtown Line is not expected to achieve breakeven anytime soon.

Singapore Taxi Business Remains Weak But Operating Metrics Are Stabilising

• ComfortDelGro remains committed to be the dominant taxi operator in Singapore. While the taxi fleet size has declined YTD, the rate of decline has slowed down. ComfortDelGro is looking to manage its taxi fleet idle rate and has offered strong incentives to its drivers. This has impacted its operating margins. In 3Q19, EBIT for taxi business was down 19% y-o-y to SGD27.4m, and EBIT margin has fallen by 1.6ppt y-o-y to 16.9%.
• ComfortDelGro noted that competition from Grab has subsided and unless there is renewed competitive intensity from ride-hailing players, its current taxi fleet size of mid-11,000 seems optimal.

Strong Revival in Growth Will Have to Come From Inorganic Growth

• With muted growth from existing business operations, revival in strong earnings growth will have to come from acquisitions or material improvement in the Singapore taxi business.
• ComfortDelGro is exploring investment opportunities in public transport businesses overseas. A net gearing of 30% would give ComfortDelGro access to SGD640m of additonal funds to undertake earnings accretive acquisitions.

Source: RHB Invest Research - 14 Nov 2019