• ComfortDelGro’s share price has depreciated 11% this year amidst concerns of the negative impact on its taxi and public transport businesses from the outbreak of the Wuhan coronavirus, which has spread beyond China to other countries where ComfortDelGro has a business presence.
• ComfortDelGro’s strong FCF generation, its relatively healthy FY20F yield of 4.6%, and P/E being in line with the 5-year average seems exciting – but we remain cautious on near-term earnings growth headwinds.
• Maintain NEUTRAL. Target Price SGD2.38.

Expect Weak 4Q19 Earnings

• ComfortDelGro (SGX:C52) will be reporting its 4Q19 and FY19 results on 14 Feb.
• We expect it to record SGD70m in recurring PATMI for 4Q19, marking a 11% y-o-y decline from 4Q18’s SGD78.4m. Taxi earnings should remain weak, amidst ComfortDelGro’s efforts to increase incentives and retain the drivers from switching over to ride-hailing players.

Downside Risks to 2020 Estimates

• In China, as instructed by authorities, ComfortDelGro has suspended all operations at its Nanjing driver training centre from 28 Jan. While it continues to operate the driving centre at Chengdu, ComfortDelGro has informed students that they can defer all confirmed test dates in February for a full refund if they so wish. The company’s 60%-owned bus station in Guangzhou, Tianhe Bus Station, has also seen a reduction of about 15% in the number of bus trips operated for the Chinese New Year period compared to the same period last year. It has also seen a drop in demand for its taxi services in China.
• With the sharp decline in travel and tourism within Asia, we believe there could be a negative impact on its Singapore taxi business as well.

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

• With the near-term negative earnings impact from the outbreak of the Wuhan coronavirus, a revival of strong earnings growth will have to come from:
  • New acquisitions;
  • A material improvement in the Singapore taxi business; or
  • A reduction in rail losses.
• ComfortDelGro’s recently-completed acquisitions have offered EBIT margins that are higher than that of its existing businesses. The company continues to explore investment opportunities in public transport businesses overseas. A net gearing of 30% will give it access to SGD640m of funds to undertake other earnings-accretive acquisitions.
• Further upside could also come from the turnaround of its rail business, especially the Downtown Line, which lost SG125m in the last three years.
• Maintain NEUTRAL.

Source: RHB Invest Research - 4 Feb 2020