Emerging Out of the Worst; Maintain BUY

• Maintain BUY as the worst appears priced in and ComfortDelGro (SGX:C52)’s long-term structural growth is unchanged.
• ComfortDelGro reported 1H20 net loss vs MKE/consensus of a FY20E profit. We cut our FY20E net profit by 48% to reflect slower recovery in rail ridership and compressed EBIT margins due to negative operating leverage.
• Lowering DCF-based Target Price to SGD1.76 from SGD1.98. Stock is trading at 1.2x P/B or 2SD away from historical mean
• ComfortDelGro should recover as countries emerge from lockdown. The key risk is a second lockdown.

It Has Been a Bumpy Ride Due to the Lockdown

• Excluding impairment, ComfortDelGro would have still missed MKE/consensus 1H20 profit estimates, albeit at 24-28% of FY20E due to high fixed cost. 2Q20 revenue fell 46% y-o-y to SGD664m as Singapore, Australia and the UK went into lockdown.
• Rail ridership and mileages for public transport services both fell. ComfortDelGro waived taxi rentals and had fewer repairs and maintenance for the automotive engineering segment. Negative operating leverage and taxi impairment provision (SGD30.8m) resulted in 2Q20 net loss of SGD42m and 1H20 net loss of SGD6.6m.
• Singapore is most impacted by rail ridership, rental waiver and reduced service fees. As a result, we have cut our overall EBIT margin to 1.4% from 7.6% on compressed taxi and public transport margin.

Worst Quarter Over; Slow U-turn

• Since the 80% plunge in rail ridership during the circuit breaker in Singapore, it has recovered to -50% pre-COVID levels in Jul. Ridership should continue to recover as working-from-home (WFH) arrangements moderate. Bus-contracting model across Singapore and Australia remains fairly stable at topline and should continue.
• We think ComfortDelGro is unlikely to offer further material rental waivers given m-o-m taxi fleet size saw slower pace of decline and drivers’ net income has almost recovered to pre-COVID level (inclusive of government grants). ComfortDelGro will scale back on their rental reliefs by year end. Further taxi impairment is not expected if there is no second lockdown.

Riding Into FY21E; Structural Growth Unchanged

• Cessation of WFH remains a near-term catalyst. ComfortDelGro will enjoy significant operating leverage in FY21E as ridership normalises. COVID-19 has made inflection point for recovery difficult to predict. That said, there is significant value as we think the worst is over. Share price rebounded 75% in 8-10 months following SARS.
• Long-term fundamentals are intact, as ComfortDelGro continues to focus on expanding its global footprint through overseas business for a more diversified portfolio.

Source: Maybank Kim Eng Research - 16 Aug 2020