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ComfortDelGro expected to bounce back to growth in FY19F

PC Lee
PC Lee • 3 min read
ComfortDelGro expected to bounce back to growth in FY19F
SINGAPORE (Aug 13): After a 3% drop in FY18F, ComfortDelGro is expected to show earnings growth in FY19, supported by increase in taxi fleet and further improvements in public transport contributions.
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SINGAPORE (Aug 13): After a 3% drop in FY18F, ComfortDelGro is expected to show earnings growth in FY19, supported by increase in taxi fleet and further improvements in public transport contributions.


See: ComfortDelGro reports 5.5% fall in 2Q earnings to $75 mil on higher costs

In 2Q18 ended June, ComfortDelGro saw an increase in revenue mainly on contributions from its public transport segments which was up 7.4% y-o-y to $66.1 million, which in turn was driven by higher mileage operated due to the commencement of the Seletar Bus Package and higher rail ridership.

In addition, new acquisitions contributed $20.4 million or 2.3% y-o-y to topline although these were partially offset by drops in taxi business of 3.5% to $31.6 million and a 1.2% y-o-y drop in automotive engineering services to $10.7 million.

Like the previous few quarters, taxi segment contributed to the bulk of decline in operating profit given the lower operating fleet in Singapore. Based on Land Transport Authority data, ComfortDelGro’s fleet stood at 12,535 as of end June, a tad lower than a quarter back in March of 12,687.

“This compares favourably against the huge q-o-q decline seen since early last year, and is a signal that the taxi fleet contraction has bottomed out. Idle rate remains similar to 1Q18 at 2%,” says DBS analyst Andy Sim in a Monday report.

As for its rail business, ridership continued to improve largely with the opening of Downtown Line Stage 3 (DTL3) since Dec 2017, with average daily ridership at 437,000/day in 2Q18. However, management indicated that rail operations remain challenging given the fare reductions implemented last December, coupled with higher operating and maintenance costs.

ComfortDelGro has been relatively active recently in pursuing inorganic growth opportunities. The latest acquisition in Australia shows management is likely to focus on bite-sized deals in markets and industries in which they are familiar with. However, have not factored in further acquisitions in our forecast, and this could be a catalyst for share price, along with reversal to growth in its taxi operations.

In a Friday report, CGS-CIMB Securities analyst Colin Tan is looking to a strong recovery in FY19F earnings and upgrading its call to “add” from “hold” with a higher DCF-based target price of $2.75, which represents 18.1 times FY19F earnings.

“Re-rating catalysts include more earnings-accretive M&As, upward rail fare revision and higher dividends,” says Tan, “Key downside risks include a pick-up in private–hire car competition which could lead to deterioration in CD’s taxi earnings.”

DBS is maintaining its “buy” recommendation with target price at $2.59. Sim says ComfortDelGro’s earnings bottom may have passed for the group, and now expects a reversal to growth of 5% in FY19F, after a 3% drop in FY18F.

“We project the sequential improvement to continue into 2H18, on the back of increased contributions from public transport services, particularly buses in Singapore; increase and introduction of newer taxi fleet; contributions from acquisitions since start of FY18,” says Sim.

However, analyst Shekhar Jaiswal of RHB Research is maintaining its “neutral” call with new target price of $2.35. Jaiswal says ComfortDelGro’s taxi business, which has seen some improvement and accounts for 30% of its EBIT, remains at risk if competition from private hire car business intensifies. At 15.3 times forward earnings, the stock is also trading close to its five-year average forward P/E of 16.3 times.

As at 10.51am, shares in ComfortDelGro are down 6 cents at $2.32.

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