• While a pick-up in commuter numbers is likely to be gradual, ComfortDelGro's share price appears to have largely priced in the weakness in transportation services due to stay-home measures, from both its taxi segment as well as from rail ridership. If there are further transport disruptions, downside is fairly limited.
• ComfortDelGro's 1H20 will see less-than-stellar performance, but the road ahead is likely to be more positive.
• Upgrade to BUY with a PE-based target price of S$1.82 (previously S$2.15).

Transportation Curtailed. How Will Ridership Resume?

• Since the Circuit Breaker measures were introduced, public transport ridership has plunged along with the taxi trips – which have now included food and groceries deliveries. According to the Land Transport Authority (LTA), compared to the pre-COVID-19 period, daily bus and rail ridership has fallen by more than 71% and 75% respectively and scheduled trips have been reduced. Ridership will likely take some time to resume normalised operating conditions.
• As a reference to countries which have eased stay-home measures - daily average transit ridership in Shenzhen was at 40-45% of normal capacity as of two months after return to work was permitted, while Hong Kong’s mobility trends for public transit indicate that it is at 75% of pre-COVID levels as of early-May 20.

Priced in Taxi Weakness

• ComfortDelGro (SGX:C52) had granted full taxi rental waiver for approximately two months with the closure of non-essential workplaces in Singapore. Further extension in rental relief could last till Sep 20, depending on prevailing conditions, which could amount up to S$26.50 per taxi per day relief until then. Given the dependence on tourism, taxi drivers would likely require support till transportation normalises.
• ComfortDelGro noted that its rental rebates would effectively cost as much as S$116m in total, assuming that the rebates are implemented fully, and would effectively push the taxi business into the red for FY20. Since the first relief measures were introduced, ComfortDelGro's share price has dropped by close to 30%.
• The taxi segment contributed S$104m in operating profits (approximately 25% of group’s operating profits) for 2019, and the taxi weakness appears to be priced in.

In a Stronger Position Than Rivals?

• ComfortDelGro’s local taxi fleet had only dipped 0.6% in 1Q20, compared with rival taxi fleet which dropped 6.4% in 1Q20. The Circuit Breaker period will prove tougher as Apr 20 industry taxi fleet showed a 3.1% drop m-o-m. Right sizing of the private hire fleet size could be a boon, given the private hire fleet number of close to 55,000.

Discount Taxis

• We attempt to assess the implied valuation of the taxi segment given ComfortDelGro’s other business units. Current market prices were utilised for SBS Transit (SGX:S61) and VICOM (SGX:V01).
• SBS Transit's share price has fallen approximately 20% since mid-Feb 20. The implied residual value of ComfortDelGro taxi segment is estimated to be at S$0.19, approximately 50% of 2019 segment book value. Current ComfortDelGro's share price levels appear to have largely priced in the negatives for the taxi segment.
• Assuming taxi valuations remain constant, a sensitivity analysis of a change in valuation of SBS Transit and VICOM shows that downside to ComfortDelGro's share price appears fairly limited.

Watching Bus Tenders

• While public transport might be weaker on the back of lower fares from rail ridership, potential bus tenders wins might prove useful given its more resilient contracting model.

Dividends Likely to Take a Hit

• As a point of reference, ComfortDelGro payout ratio in FY08 had dropped to 52% (FY07: 85%).

Cut Net Profit Forecasts by 35% for FY20 and 13% for FY21-22

• We factor in the rental rebates until Sep 20, as well as a lower ridership for rail transport due to the COVID-19 pandemic. Our assumption for rail ridership is a staggered recovery till normalcy in 4Q20, with an average of 30% of normal capacity in 2Q20. In our view, the lower ridership should be aided to a certain extent by:
  1. the Budget’s job support scheme (approximately 2,900 bus captains are Singaporeans/PRs, and
  2. Lower fuel and maintenance costs.

Upgrade ComfortDelGro to BUY

• Upgrade ComfortDelGro to BUY with a lower target price of S$1.82, pegged to its long-term forward mean PE of 16.7x on 2021F earnings.
• We deem that the current price has largely factored in weakness in transport services for 2020. ComfortDelGro trades at 13x 2021F PE. Barring another round of infections and stay-home measures, the resumption of commuters post circuit breaker should provide progressive relief, especially for its rail services.

ComfortDelGro Share Price Catalyst

• Easing of stay-home measures.
• Bus tender contract wins.
• Earnings-accretive overseas acquisitions.
• Regulatory changes in public transport.

Source: UOB Kay Hian Research - 20 May 2020