Company Update Singapore 15 February 2018 Transport | Road & Rail Neutral (Maintained) ComfortDelGro Corporation Target Price: SGD1.98 Price: SGD2.02 North East Line Transitions To NRFF Market Cap: USD3,311m Bloomberg Ticker: CD SP ComfortDelGro’s North East MRT line (NEL) will operate under the NRFF Share Data from Apr 2018. The transition to NRFF would enable it to operate NEL Avg Daily Turnover (SGD/USD) 23.0m/17.2m under an asset-light operating framework for next 15 years, ie this would 52-wk Price low/high (SGD) 1.90 - 2.77 save ComfortDelGro from a large capital outlay on the purchase and replacement of rail operating assets. However, the company will have to Free Float (%) 100 pay an undisclosed annual licence charge and see its EBIT margin for Shares outstanding (m) 2,164 NEL being capped at 5%. We trim FY18F-20F earnings by 2-3% and adjust Estimated Return -2% our TP to SGD1.98 (from SGD2.05, 2% downside) to account for NRFF. Maintain NEUTRAL, as the stock lacks near term re-rating catalysts, and a Shareholders (%) dividend yield of 5% continues to provide support to its share price. Blackrock 6.0 Revision to licence terms under the new rail financing framework (NRFF). Schroders 5.0 ComfortDelGro’s new licence term under NRFF will start in April for a period of Vangaurd 2.4 15 years, with an option to extend the term for another five years. Under the Share Performance (%) NRFF, it will no longer need to buy over or renew and replace NEL’s operating assets from the Land Transport Authority (LTA). On the contrary, the LTA will YTD 1m 3m 6m 12m pay SGD28.8m to buy over NEL’s existing operating assets currently owned by Absolute 2.0 (0.5) (2.9) (12.2) (18.2) ComfortDelGro. This will be payable in cash (60% payable upfront and the Relative 2.0 2.9 (3.0) (15.0) (29.0) remaining 40% to be paid over two years). ComfortDelGro intends to use the Source: Bloomberg proceeds to repay borrowings. The transition to NRFF will also require it to pay an undisclosed annual licence charge to the LTA over the licence period. ComfortDelGro Corporation (CD SP) Price Close Relative to Straits Times Index (RHS) Revenue risk and profit-sharing terms. The licence charge structure under 3.0 111 2.8 103 the NRFF provides for some sharing of revenue risks and profit-sharing 2.6 94 2.4 86 between ComfortDelGro and the LTA. Under the “fare revenue shortfall sharing” 2.2 78 2.0 69 mechanism, if actual revenue falls short of the target revenue by 2-6%, LTA will 1.8 61 60 share 50% of the shortfall. However, if the shortfall between the actual revenue 50 and the target revenue exceeds 6%, LTA will bear 75% of the incremental 40 revenue shortfall beyond 6%. For profit-sharing, NEL’s EBIT margins will be 30 20 exposed to a cap-and-collar mechanism. If the EBIT margin is lower than 3.5%, 10 LTA will share 50% of the shortfall. However, if the EBIT margin exceeds the Volm 17 17 17 17 17 17 - - - - - cap of 5%, the excess will be shared via a tiered structure, whereby 85% to - Apr Oct Jun Feb Aug Dec 95% of the incremental EBIT above the 5% cap will be shared with LTA. Source: Bloomberg Assessment of decline in rail earnings. While ComfortDelGro has stopped disclosing the segmental revenue and operating profit for its rail business in Singapore, a quick back-of-the-envelope calculation suggests that capping of NEL’s EBIT margins at 5% under the NRFF could lower its EBIT by 3-4% over the licence period. We have factored in the realisation of cash from the sale of operating assets to the LTA over three years, and lowered our EBIT margin estimates for the public transport business accordingly. NEUTRAL. The transition to NRFF further weakens its near-term earnings growth outlook, which continues to be weighed down by a weak taxi business in Singapore. We lower FY18F-20F earnings by 2-3% to account for the lower EBIT margin for NEL operations. Given the lack of re-rating catalysts, we maintain our NEUTRAL rating, with a revised DCF-derived TP of SGD1.98. Forecasts and Valuations Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Total turnover (SGDm) 4,060 3,971 4,042 4,137 4,244 Reported net profit (SGDm) 317 302 299 308 323 Recurring net profit (SGDm) 317 302 299 308 323 Recurring net profit growth (%) 5.0 (4.9) (0.9) 3.0 4.8 Recurring EPS (SGD) 0.15 0.14 0.14 0.14 0.15 DPS (SGD) 0.10 0.10 0.10 0.10 0.11 Recurring P/E (x) 13.7 14.5 14.6 14.2 13.5 P/B (x) 1.76 1.67 1.63 1.58 1.53 P/CF (x) 5.42 7.27 5.83 6.17 6.17 Dividend Yield (%) 5.1 5.1 5.0 5.1 5.4 Analyst EV/EBITDA (x) 5.25 5.42 5.41 5.27 5.08 Shekhar Jaiswal Return on average equity (%) 13.2 11.8 11.3 11.3 11.5 Net debt to equity net cash net cash net cash net cash net cash +65 6232 3894 Our vs consensus EPS (adjusted) (%) (0.6) 0.2 0.0 [email protected] Source: Company data, RHB See important disclosures at the end of this report 1 Powered by the EFA Platform ComfortDelGro Corporation Singapore Company Update 15 February 2018 Transport | Road & Rail Financial Exhibits Financial model updated on : 2018-02-14. Asia Financial summary Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Singapore Recurring EPS (SGD) 0.15 0.14 0.14 0.14 0.15 Transport EPS (SGD) 0.15 0.14 0.14 0.14 0.15 ComfortDelGro Corporation DPS (SGD) 0.10 0.10 0.10 0.10 0.11 Bloomberg CD SP BVPS (SGD) 1.15 1.21 1.24 1.28 1.32 Neutral Weighted avg adjusted shares (m) 2,154 2,160 2,164 2,164 2,164 Valuation basis Valuation metrics Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Given its consistent ability to generate positive free Recurring P/E (x) 13.7 14.5 14.6 14.2 13.5 cash flow, we value the company using a DCF P/E (x) 13.7 14.5 14.6 14.2 13.5 approach. Our DCF-based SGD1.98 TP is based on a WACC of 8% and a terminal growth rate of 0.5%. P/B (x) 1.76 1.67 1.63 1.58 1.53 FCF Yield (%) 7.7 4.7 8.5 8.2 8.2 Key drivers Dividend Yield (%) 5.1 5.1 5.0 5.1 5.4 Key earnings drivers are: EV/EBITDA (x) 5.25 5.42 5.41 5.27 5.08 i. Transition of its bus business to the government EV/EBIT (x) 9.7 10.8 10.5 10.1 9.6 contracting model; ii. Continued strong growth in its UK bus business Income statement (SGDm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F despite the negative exchange rate impact; iii. Strong growth in the rail business. Total turnover 4,060 3,971 4,042 4,137 4,244 Gross profit 4,060 3,971 4,042 4,137 4,244 Key risks EBITDA 858 818 794 792 797 Key downside risks to earnings are: Depreciation and amortisation (396) (409) (384) (380) (376) i. Lower-than-estimated margins for its Singapore Operating profit 462 409 410 412 421 bus business under the government contracting Net interest (1) 12 18 29 41 model; Income from associates & JVs 5 5 5 5 5 ii. Further delays in the breakeven point of Downtown Line operations; Pre-tax profit 467 425 432 445 467 iii. Sharp appreciation in oil prices; Taxation (88) (77) (86) (89) (93) iv. Lower-than-estimated growth in Singapore’s Minority interests (61) (47) (47) (48) (51) taxi fleet. Recurring net profit 317 302 299 308 323 Company Profile Cash flow (SGDm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F ComfortDelGro, one of largest land transport Change in working capital 9 (146) 43 5 5 companies in the world, is a market leader in Cash flow from operations 803 600 750 708 708 Singapore and has a significant overseas presence. Its businesses include bus, taxi, rail, car rental & Capex (467) (394) (380) (350) (350) leasing, automotive engineering services, testing Cash flow from investing activities (371) (254) (397) (304) (292) services, driving centre, insurance broking services, Dividends paid (230) (283) (239) (220) (229) outdoor advertising and car dealership. Cash flow from financing activities (321) (507) (250) (231) (239) Cash at beginning of period 788 779 596 700 872 Net change in cash 111 (161) 103 173 177 Ending balance cash 880 615 700 872 1,049 Balance sheet (SGDm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Total cash and equivalents 779 607 722 888 1,059 Tangible fixed assets 2,887 2,723 2,690 2,660 2,633 Intangible assets 645 640 655 655 655 Total investments 74 38 90 95 99 Total other assets 264 261 261 261 261 Total assets 5,122 4,828 4,984 5,138 5,303 Short-term debt 169 114 114 114 114 Total long-term debt 176 208 208 208 208 Other liabilities 111 96 96 96 96 Total liabilities 1,930 1,790 1,839 1,858 1,877 Shareholders' equity 2,476 2,618 2,678 2,766 2,860 Minority interests 717 420 467 515 566 Total equity 3,192 3,038 3,144 3,281 3,425 Net debt (434) (284) (399) (566) (737) Total liabilities & equity 5,122 4,828 4,984 5,138 5,303 Key metrics Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Revenue growth (%) (1.3) (2.2) 1.8 2.3 2.6 Recurrent EPS growth (%) 4.6 (5.2) (1.0) 3.0 4.8 Gross margin (%) 100.0 100.0 100.0 100.0 100.0 Operating EBITDA margin (%) 21.1 20.6 19.6 19.1 18.8 Net profit margin (%) 7.8 7.6 7.4 7.4 7.6 Dividend payout ratio (%) 70.1 74.6 72.5 72.5 72.5 Capex/sales (%) 11.5 9.9 9.4 8.5 8.2 Interest cover (x) 32.1 37.9 37.9 38.1 39.0 Source: Company data, RHB See important disclosures at the end of this report 2 ComfortDelGro Corporation Singapore Company Update 15 February 2018 Transport | Road & Rail SWOT Analysis Diversified business operations in Singapore and A slowdown in overseas rail ridership could dampen Second-largest land transport operator globally by earnings size of operations recovery in the segment Rising operating costs Opportunities to expand overseas in countries such as the UK, Australia and China, where the group has presence Currency fluctuations may affect profits, which are reported in SGD Recommendation Chart Date Recommendation Target Price Price Price Close 2018-02-14 Neutral 2.05