1HFY20 Net Loss, as Expected; BUY on Weakness

• ComfortDelGro (SGX:C52) issued a profit warning.
• ComfortDelGro's 1HFY20 losses were likely due to impairment in its taxi division. We had already factored in operation weakness into our forecasts. Structural growth is intact, while ComfortDelGro remains a key beneficiary from rising ridership as Singapore emerges from the lockdown.
• Maintain DCF-based SGD1.98 Target Price.
• 2QFY20 results in mid-Aug.
• Downside risk: negative operating leverage.

ComfortDelGro Issued Profit Warning

• ComfortDelGro is expecting a 1HFY20 net loss due to:
  1. significant impact of Covid-19 on its operating regions; and
  2. the possibility of impairment of investments in certain local and overseas subsidiaries.
• We think impairment could come from its taxi business, which is bearing the brunt of Covid-19. This was expected and we have built in substantial weakness in our FY20E taxi EBIT.
• Going forward, we do not expect further material rental reliefs for taxis given Singapore’s Phase 2 re-opening.

Impairment Could be From Taxi Business

• ComfortDelGro did not indicate which division is subject to impairment but we think it is likely the taxi business from COVID-19 pressure and idle fleets. The Group took an earlier impairment charge of SGD27.3m in FY19 for taxis in Singapore and China given competition from private-hire players. This was 0.5% of FY19 total assets. A similar charge off now would imply an impairment of SGD26.2m – a 17% downside to our FY20E EPS.

Losses for Taxi Division Factored in

• ComfortDelGro had already previously warned that its taxi division could face losses since Mar-20 due to the substantial amount of taxi rental reliefs (~SGD117m) given to taxi drivers amid Covid-19. We have already built such weakness into our model.
• We expect taxi EBIT margin to drop sharply to 2% in FY20E, from 15.6% in FY19. But with Singapore’s Phase 2 re-opening since 1 June, we do not expect further substantial rental rebates going forward, which may offset some of the downside from impairment charges.

Structural Growth and Recovery Play Unchanged

• We believe investors should BUY on price weakness as ComfortDelGro continues to focus on expanding its stable, non-volatile bus contracting model, which accounted for 63% of FY19 revenue. Meanwhile, as mentioned, ComfortDelGro will be a key beneficiary as economic activities resume in Singapore.
• Even with an impairment charge of SGD26.2m, our conservative FY20E DPS of SGD0.043 (based on 60% payout ratio vs 73% 5-year average) is still well supported by FCF.

Source: Maybank Kim Eng Research - 28 Jun 2020