SINGAPORE (Feb 13): The road ahead is paved with challenges for land transport operator ComfortDelGro.
Its taxi business, in particular, faces off with third-part taxi apps and the twin threat of private-hire car service providers Grab and Uber.
(See ComfortDelGro’s fair value driven down by Uber, Grab)
Singapore’s bus and rail transport landscape is also changing.
ComfortDelGro subsidiary SBS Transit has seen its bus operations make the move to the government contracting model (GCM).
Meanwhile, Singapore’s Land Transport Authority (LTA) last year paid rail competitor SMRT Trains some $991 million under a new rail financing framework (NRFF) deal to take over its operating assets.
(See Close to 99% of SMRT shareholders vote ‘yes’ to sale of assets to govt)
New driver at the helm
On Friday, the same day it reported a 5% rise in full year earnings to $317.1 million, ComfortDelGro announced that founding managing director and group chief executive officer Kua Hong Pak has decided to step down after 14 years at the helm.
He will be succeeded by Yang Ban Seng, the current CEO of ComfortDelGro Taxis, on May 1, 2017.
(See ComfortDelGro full year earnings 5% higher at $317 mil)
Can ComfortDelGro continue to steer clear of major potholes under the new leadership?
“We are not surprised nor overly concerned with Mr Kua (aged 73) stepping down, as we deem it as part of management succession,” says DBS Group Research analyst Andy Sim in a Monday report.
“Despite operating headwinds and skepticism, ComfortDelgro’s management continues to deliver consistent and steady growth,” Sim says.
Sim is keeping ComfortDelGro at “buy” with a lower target price of $2.94, from $3.09 previously.
Over at UOB Kay Hian, analysts, too, are unruffled by ComfortDelGro’s leadership change.
“Nevertheless, we understand Mr Kua will continue to assume the position of Senior Advisor to counsel the group and mentor the newly-appointed CEO,” says UOB lead analyst Andrew Chow.
Rise of the taxi alternatives
Chow, however, voices concerns that “times [are] getting tougher for Singapore taxis”.
“While ComfortDelGro’s taxi operations are performing relatively well in Singapore with a utilisation of 98.6% seen in 2016, we believe operating conditions will deteriorate further as supply of private hire cars are increasing, leading to pressure on taxi rentals,” he says.
As such, UOB is cutting its 2017 net profit forecast by 7% and its 2018 net profit forecast by 10%, to reflect a “more challenging environment for taxis in Singapore”.
Chow has downgraded ComfortDelGro to “hold” from “buy” with a lower target price of $2.47, from $2.90 previously.
Maybank Kim Eng lead analyst John Cheong agrees, warning of weakness in the taxi segment due to market maturity, competition, and a slower economy.
“The outlook has turned more bearish for the taxi segment amid a challenging operating environment, where management guided for a decline in taxi revenue for the first time,” Cheong says in a Monday report.
Cheong is keeping his “hold” call on ComfortDelGro, with a higher target price of $2.68, from $2.63 previously, to reflect a “positive change” in its bus model.
ComfortDelGro’s Singapore and Australia bus segments, Cheong adds, are the company’s “only bright spots”.
The wheels on the bus go round and round
In addition, UOB’s Chow believes contributions from ComfortDelGro’s Singapore bus segment should improve in 2017, as 2016 only reflected four months of effect from the new bus contracting model.
RHB analyst Shekhar Jasiwal, however, points out that ComfortDelGro has merged the disclosure of its bus and rail business under a combined “public transport services” banner, which makes it difficult to better estimate the outlook for each individual business.
Nevertheless, Jaiswal says growth is expected to be supported by improving contributions from public transport services.
“We see strong revenue visibility from the local bus business via the government contracting model (GCM), higher revenue from the Australian bus wing and improving rail revenue from improved ridership amidst Downtown Line 3’s opening later this year that should support earnings growth,” Jaiswal says in a Monday report.
Jaiswal is keeping RHB’s “buy” recommendation on ComfortDelGro, but has cut its target price to $3.00, from $3.24 previously.
Like UOB, Jaiswal highlights that RHB has lowered ComfortDelGro’s 2017 and 2018 earnings by 10 and 14%, respectively, to account for lower revenue contributions from the taxi business.
Meanwhile, OCBC Investment Research says the sale of bus assets to LTA could benefit shareholders.
“As ComfortDelGro receives cash from the sale of bus assets to LTA, we expect dividend payout to continue its progressive increase over time, or be used for overseas expansion,” says OCBC lead analyst Eugene Chua in a Monday report.
OCBS is keeping its “buy” call on ComfortDelGro with an unchanged fair value estimate of $2.95.
ComfortDelGro increased its dividend payout to 70% in 2016, from 64% a year ago.
“We expect ComfortDelGro to gradually increase its dividend payout ratio to 80%, translating into a 5.8% yield in 2019,” says RHB’s Jaiswal.
As at 2.51pm, ComfortDelGro is trading 3 cents higher at $2.54.
