ComfortDelGro Corporation - Growth With Improving Yield
- ComfortDelGro offers over 10% earnings growth over the next few years with an increasing payout ratio to 75%, which translates into 4.6-5.7% yields in 2017F-2018F.
- Implementation of the GCM for Singapore bus business, gradual growth in Singapore taxi business, gradual improvement in rail profitability and continuing profits from international operations support our bullish case on the stock.
- ComfortDelGro should continue to deliver strong FCF despite an uncertain macroeconomic environment.
- Maintain BUY with SGD3.24 TP.
Recently announced earnings accretive acquisition.
- ComfortDelGro’s plans to acquire a 49% stake in ComfortDelGro Cabcharge from its partner, Cabcharge Australia, for AUD186m should boost its earnings by 3.0-3.3% (already factored in our estimates).
- Subject to approval from the Australian Foreign Investment Review Board, the acquisition is expected to be completed in 1Q17.
- With a strong net cash balance sheet, we believe there is potential for more such earnings accretive acquisition to be undertaken in 2017.
Singapore bus business to witness margin expansion.
- We expect ComfortDelGro’s Singapore bus business to book 7-8% EBIT margins from 4Q16 (from operating losses for core bus operations till early 2016) under the GCM, which should support growth into 2017.
- The GCM transfers revenue risks of operating public bus services to the Government, as the bus operators are compensated through a fixed fee to operate the bus services. This effectively converts Singapore’s public bus operations into an asset light and cost plus business model.
Taxi business remains resilient.
- Its Singapore taxi business has seen negligible impact from rising competition presented by Uber and Grab. Its taxi hire-out rate remains close to 100% and revenue grew 6-7% YoY in 3Q16.
- While we expect the growth of its fleet to decelerate, its taxi rental rates (and taxi revenues) should rise as it continues to replace older cars with newer taxis.
Ridership growth should support improvement in the rail business.
- Its rail unit should see revenues increase amidst higher ridership once the Downtown Line Stage 3 (DTL3) is operational in Sep 2017, despite the recently-announced 4.2% fare reduction.
- Over the medium to longer term, we believe that ComfortDelGro should benefit from rail ridership growth and average fare increases, as the population grows and shifts away from the city.
Growth in an uncertain business environment.
- We view ComfortDelGro as a well-diversified company with an excellent management team that has the ability to generate strong cash flow, deliver steady profit growth, and offer gradual dividend growth.
- Acquisitions, similar to the one just announced, could further boost earnings growth despite an uncertain economic environment.
- We reiterate our BUY call with a DCF-based TP of SGD3.24.
- Key risks are a lower- than-estimated margin for the Singapore bus business, drop in taxi hire out rate, and transition of the North East MRT line to the New Rail Financing Framework, which would limit the margin upside for the rail business.