HIGH CONVICTION Company Note Public Transportation │ Singapore │ March 7, 2019 Shariah Compliant Insert Insert Singapore ComfortDelGro ADD (no change) Key takeaways from Kuala Lumpur NDR Consensus ratings*: Buy 13 Hold 3 Sell 1 Current price: S$2.42 ■ We hosted an NDR for CD in Kuala Lumpur last week; investors’ concerns on Target price: S$2.74 the impact of ride-hailing services on CD’s taxi business were discussed. Previous target: S$2.74 ■ CD reaffirmed its strategy to seek growth via acquisitions, mainly in Up/downside: 13.2% developed cities, and it has wide debt headroom (c.S$800m) to fund them. CGS-CIMB / Consensus: 3.9% ■ Maintain Add with unchanged DCF-derived TP of S$2.74. Upside catalysts Reuters: CMDG.SI could come from further earnings-accretive M&A and taxi fleet expansion. Bloomberg: CD SP Market cap: US$3,859m Still a viable long-term growth stock, in our view S$5,240m We brought CD to meet investors in Kuala Lumpur on 25 Feb 2019. Investors’ questions Average daily turnover: US$12.06m were mostly related to the outlook of the taxi business in Singapore, M&A opportunities in S$16.39m the pipeline, and CD's near-term earnings growth drivers. We believe CD remains a Current shares o/s: 2,164m Free float: 99.6% viable long-term growth stock, with its taxi business now on a more solid footing and its *Source: Bloomberg earnings growth to be mainly driven by its public transport services and M&A. Key changes in this note Concerns on ride-hailing disruption to taxis alleviated No changes Investors concur with CD’s view that both Grab and Go-JEK may have shifted their key growth emphasis from ride-hailing to other businesses such as insurance and mobile payment, which would bode well for CD’s Singapore taxi business. Likewise, we think the Price Close Relative to FSSTI (RHS) likelihood of ride-hailing competition intensifying hereon is slim. We think taxi earnings 2.50 128.3 upside could come from: 1) continual fleet replacement with new hybrid models that fetch 2.30 116.9 higher rental rates, and 2) net expansion of its taxi fleet. 2.10 105.4 1.90 94.0 40 M&A remain a key strategy to drive growth… 30 20 In response to questions on whether CD would tone down its acquisition spree, CD 10 Vol m Vol reaffirmed that it would continue to seek growth through viable earnings-accretive Mar-18 Jun-18 Sep-18 Dec-18 acquisitions. It would probably be looking to extend its operating presence further in Source: Bloomberg Australia due to a stable economic environment and good margins (in the teens) . Other Price performance 1M 3M 12M key target markets for acquisitions would probably be urban cities in developed nations; Absolute (%) 4.3 15.8 21.6 CD prefers to obtain a controlling stake in the acquired entities. Relative (%) 3.1 12.4 29.3 …with plenty of debt headroom to fund acquisitions Major shareholders % held Blackrock 7.0 As at end-Dec 2018, CD has S$16m in net cash. Its target cap of 30% net gearing Vanguard Group 2.7 implies that it could gear up by another S$800m to fund its acquisitions ahead. Capital Group 2.0 Insert Maintain Add We retain our Add rating and our DCF-based TP of S$2.74 (WACC: 7.8%), which implies 17.5x FY20F P/E. The stock is currently trading at 15.5x FY20F P/E, below its 7-year historical average (16.7x), along with FY19F dividend yield of 4.6%. An affirmed expansion of its taxi fleet in the coming months and further earnings-accretive M&A could re-rate the stock. Key risks to our call are stagnating/declining taxi fleet and weaker-than- expected contributions from its acquisitions. Analyst(s) Financial Summary Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F Revenue (S$m) 3,576 3,805 3,834 3,932 4,027 Operating EBITDA (S$m) 818.0 828.0 884.9 910.8 935.4 Net Profit (S$m) 301.5 303.3 326.7 339.0 349.1 Core EPS (S$) 0.14 0.14 0.15 0.16 0.16 Core EPS Growth (7.79%) 1.63% 9.17% 3.76% 3.00% FD Core P/E (x) 17.80 17.51 16.04 15.46 15.01 DPS (S$) 0.10 0.11 0.11 0.11 0.12 Colin TAN Dividend Yield 4.30% 4.34% 4.55% 4.73% 4.86% EV/EBITDA (x) 6.55 6.81 6.29 6.02 5.79 T (65) 6210 8685 P/FCFE (x) 18.88 21.26 15.07 14.16 13.96 E [email protected] Net Gearing (9.36%) (0.54%) (2.96%) (5.38%) (7.46%) Cezzane SEE P/BV (x) 2.00 2.01 1.93 1.86 1.80 T (65) 6210 8699 ROE 11.5% 11.4% 12.3% 12.3% 12.2% E [email protected] CIMB/consensus EPS (x) 1.01 1.03 1.01 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE Powered by the UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform Public Transportation │ Singapore ComfortDelGro │ March 7, 2019 Key takeaways from Kuala Lumpur NDR Taxi business looks set for gradual recovery Mild competition from ride-hailing firms We observed that since Go-JEK (Unlisted) cut its cash incentives in Jan 2019, its peak-hour fares have risen from about S$20 on average in Jan (based on 10.4km mileage) to S$22-24, matching closer to Grab’s (Unlisted) rates during peak hours. While this could bring about better gross fare earnings for Go-JEK drivers, it could also slow down or deter new users from joining its ride-hailing platform, in our view. Overall, we still think the operating environment for CD’s taxi business has largely stabilised in the absence of aggressive price undercutting and drivers’ incentives from Grab or Go-JEK. Taxi ridership: 70% from street hails Street hails on roadsides and taxi-stands accounted for about 60-70% of CD’s taxi ridership in Singapore in FY18, according to management. Taxi bookings also enjoyed robust growth of 7-8% yoy in FY18. We think that in general, CD’s taxi drivers are still able to get more rides (from street hails in addition to app bookings) than Grab or Go-JEK drivers and thus, potentially have better earnings than private hire-car drivers. We had highlighted this in our earlier note on 31 Jan 2019: 60 days after Go-JEK’s soft launch…. Fleet replacement could lift rental income... We believe newer taxi hybrid models could fetch daily rental rates of c.S$120 vs. S$80-90 per day for some older diesel models. Thus, replacing older models without a net expansion in fleet could still lead to better taxi earnings for CD, in our view. Based on historical data (including new taxi registrations and de-registrations) from the Land Transport Authority (LTA), we estimate that about 930 or 5% of the taxis in Singapore are aged six to eight years, assuming only older taxi models aged six years and above were scrapped in the past few years. Given that CD commands about 60% share of Singapore’s taxi fleet as of Dec 2018, we think its orders for 600 new hybrid models, which it expects to take delivery of in the next few months, could replace almost, if not all of its taxis that are already aged six years and above (note that the statutory life span of taxis in Singapore is eight years). 2 Public Transportation │ Singapore ComfortDelGro │ March 7, 2019 Figure 1: About 5% of taxis (c.930) in Singapore are aged 6 Figure 2: Age demographics of taxis in Singapore, based on our years and above as at end-Dec 2018, based on our estimates estimates 14,000 2018 38% 57% 5% 12,000 10,000 2017 46% 49% 5% 8,000 0.5% 48% 6,000 21% 2016 44% 40% 16% 4,000 2,000 17% 2015 42% 44% 14% 9% 4% 0 0.5% 6 - < 8 yrs 3 - < 6 yrs < 3 yrs 0 5,000 10,000 15,000 20,000 25,000 30,000 Hybrid taxis Non-hybrid taxis Electric taxis < 3 yrs 3 - < 6 yrs 6 - < 8 yrs SOURCES: CGS-CIMB RESEARCH, LTA SOURCES: CGS-CIMB RESEARCH, LTA … and at lower costs Prevailing Quota Premium (PQP) for Cat A Certificates of Entitlement (COEs) was on a downtrend in recent years and closed at about S$26,000 as at Dec 2018, well below the S$38,000-71,000 level seen in 2011-2012. This suggests that CD would be purchasing new and replacement taxis this year at much lower costs than taxis purchased 6-8 years ago. Figure 3: Historical COE prices S$ 100,000 Title: 90,000 Source: 80,000 70,000 60,000 50,000 40,000 30,000 Period w hen taxis (aged 6y 20,000 & above) w ere purchased 10,000 0 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Dec-10 Sep-11 Dec-11 Sep-18 Dec-18 Sep-12 Dec-12 Sep-13 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 Cat A COE Prevailing Quota Premium CAT E COE * Prior to Aug-12: Bid for Cat A or E COE to register a new taxi; Cat A COE for replacement taxi.