• While we continue to like the defensive nature of COMFORTDELGRO (SGX:C52)’s public transport business earnings and the company’s strong FCF generation capability, we remain cautious about the near term headwinds from rising operating costs for its rail business and weak taxi earnings.
• Despite our expectation for 7% earnings growth in 2020, the stock is trading at 17x 2020F P/E vs a 5-year average of 15x and it looks fairly priced. Maintain NEUTRAL.
• A healthy and sustainable dividend yield of 4% should provide support to share price.

Re-rating Catalysts Could Come From New Acquisitions, a Revival of Taxi Business or Turnaround of Its Rail Business

• With muted growth from existing business operations, revival of strong earnings growth will have to come from new acquisitions, improvement in the Singapore taxi business or reduction in rail losses. ComfortDelGro’s recently completed acquisitions have offered EBIT margins that are higher than that of its existing businesses; ComfortDelGro continues to explore investment opportunities in public transport businesses overseas.
• A net gearing of 30% would give ComfortDelGro access to SGD640m of funds to undertake other earnings accretive acquisitions. A further upside could also come from the turnaround of its rail business, especially the Downtown Line, which lost SGD125m in last three years.

Public Transport Business to Drive Earnings Despite Headwinds

• Contribution from new bus contracts in Singapore (Seletar and Bukit Merah packages), acquisitions, and lower losses from its rail business (amidst an increase in fares) should continue to drive ComfortDelGro’s growth in 2020.
• On the other hand, costs are also expected to remain elevated amidst higher operating and maintenance costs related to mid-life refurbishments to be undertaken at the North-East Line.
• The introduction of fixed licence charge related to operations of Downtown Line will also keep a check on public transport margins. The fixed licence charge, which is estimated at SGD15m for 2019, is expected to increase by SGD5m every year going forward.

Singapore Taxi Business Remains a Weak Spot

• Although the competitive intensity from ride-hailing players has dropped recently with Grab reducing the incentives that it offers to its drivers, ComfortDelGro still seems to be struggling to stabilise its taxi fleet size and the idle rate. Based on latest available data from the Land Transport Authority (LTA), its fleet size has declined 10% in 2019 (till Sep 19). ComfortDelGro is offering strong incentives to its taxi drivers, which we believe will continue to impact its operating margins.
• Further downside risks could come from a continuing decline in taxi fleet size, a sharper-than-estimated decline in margins and loss of existing contracts for the public transport business.

Source: RHB Invest Research - 6 Dec 2019