Monday, 13 February 2017

BUMPY ROAD AHEAD FOR COMFORTDELGRO

TARGET PRICE: S$2.17 (SELL

DOWNSIDE: 15%⬇



ComfortDelGro Corporation released their FY 2016 results last Friday, posting a 5% increase in net profit, with earnings per share rising to 14.72 cents, up from 14.1 cents in FY 2015. Dividend per share has increased from 9 cents to 10.3 cents. However, ComfortDelGro's management has cautioned that the operating environment ahead remains challenging. We have a sell call on the stock, given the increasing competition from private hire operators and the weak Pound. 


Increased competition from Private-Hire Opeartors


Stiff competition from private-hire firms Uber and Grab continues to put pressure on earnings for ComfortDelGro.

The various sources of operation profits for ComfortDelGro are as follows:


Source: ComfortDelGro Annual Report 2015

















Operating profits from the taxi business segment makes up 36.4% of the group's total. Recently, rival taxi operator TransCab cut its taxi rental rates by around 30% amid increasing pressure from taxi drivers due to stiff competition from Uber and Grab. Similarly, ComfortDelGro responded by introducing a flexi-rental scheme for its drivers, reducing the rental rate for Hyundai Sonata vehicles from about $100 a day to $85-90. This means a drop in operating profits of around 15%. However, we believe that there might still be further reduction of taxi rental, given that the rent for private hire vehicles are as little as $60 a day. Our conservative estimate would be a 25% drop in operating profits for the taxi segment. Consequently, net profit after taxation would be even lower.


Weaker pound due to Brexit uncertainties


The weakening of the Pound against the Singapore Dollar would reduce the profits from the United Kingdom.


Source: ComfortDelGro Annual Report 2015




The UK / Ireland geographical segment accounts for 20.5% of operating profits, which is the largest foreign market for ComfortDelGro. Since Britain voted to leave the European Union on Jun 23 last year, the Pound has fell by around 10% against the Singapore Dollar. With Brexit uncertainties still looming, we believe that the Pound may still fall by another 5-10% against the Singapore Dollar within the next 12 months. Consequently, profits from the UK would continue to be negatively affected by the unfavourable foreign currency translation effect. 


Our Valuation



201220132014201520162017F
EARNINGS PER SHARE11.912.413.314.114.712.8
DIVIDEND PER SHARE6.407.008.309.0010.309.00
PAYOUT RATIO53.78%56.45%62.41%63.83%70.07%70.31%



We forecast a 13% decrease in earnings per share for FY 2017 to 12.8 cents. We expect the combined effect of reduced taxi rental revenue and the weaker Pound to continue to put pressure on earnings per share. Assuming a P/E ratio of 17, our 12-month target price is S$2.17, a 15% downside from $2.54 today. 

We also note that ComfortDelGro's dividend of 10.3 cents reflects a payout ratio of 70%, and the payout ratio has been rising over the past 5 years. This is higher than the management's targeted 50% payout ratio. Should FY 2017 earnings fall, we foresee that the dividend may be cut. 




Factors that may affect our view


  • Less competition in the taxi business due to increased regulation on private hire operators. The Land Transport Authority has recently began to enforce more rules on private hire vehicles. However, private hire drivers still maintain a cost advantage.

  • Volatile oil prices are expected to continue through 2017, a fall in the price of oil would reduce ComfortDelGro's operating costs, which positively impacts net profits.




Disclaimer

This research report is based on information obtained from sources believed to be reliable. AlpacaInvestments does not make any representation or warranty as to its accuracy, completeness or correctness. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, you should not act on it without independently verifying its contents. This publication has not been reviewed or authorized by any regulatory authority in Singapore or elsewhere. AlpacaInvestments accepts no liability arising whether directly or indirectly as a result of the recipient acting on such information or opinion or estimate. This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. AlpacaInvestments may from time to time have interests in the securities mentioned in this report, and our opinions expressed in this report are subject to change without notice. This report is intended for information purposes only, and should not be regarded as a substitute to your own judgement. 





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