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3Q21: Underwhelming Results But New Regulations Poised To Boost Earnings

CD reported PATMI of S$25.8m for 3Q21, increasing 19.4% yoy but dropping sharply by 25.9% qoq from 2Q21. COVID-19 outbreaks in key markets led to suppressed ridership and earnings. Due to uneasy market conditions, the planned IPO of a
subsidiary was called off. Looking forward, the easing of COVID-19 measures will continue to be positive for ridership while favourable regulatory changes provide strong tailwinds. Maintain BUY with a higher target price of S$1.99.

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RESULTS

3Q21 operational update: Dragged down by COVID-19 but recovery underway. ComfortDelgro Corporation (CD) reported 3Q21 PATMI of S$25.8m (including government relief), a 25.9% qoq drop from 2Q21. The sharp drop in 3Q21 was due to COVID-19 outbreaks in key markets which led to restriction measures being implemented in Singapore and Australia. Government relief tapered off in 3Q21 at S$19.8m, vs S$44.2m in 2Q21, while higher taxi rebates in Singapore further depressed revenue. 9M21 PATMI was S$116.8m, accounting for 60% of our full-year forecast and below our expectations. Looking forward, management has noted that the transition to endemic living and reopening of international borders in key markets would help underpin earnings.

Public transport: Government aid easing lockdown pains. 3Q21 revenue was resilient at S$710.6m (+10.9% yoy, +0.3% qoq) as government relief in the UK and Singapore helped support lower activity levels. Full schedules on UK’s public bus
services as well as stable public transport schedules in Australia also helped lift revenue. However, 3Q21 operating profit fell to S$32m (-4.2% yoy, -16.2% qoq) caused by a slowdown in Australia’s bus chartering business. In Singapore, Phase 3 (Heightened
Alert) restrictions caused 3Q21 total daily ridership for Downtown Line (DTL), North-East Line (NEL) and Sengkang/Punggol LRT lines to drop 5% yoy, 58% of pre-COVID-19 levels.

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Taxi: Worst hit by COVID-19 restrictions. As lockdown measures kicked in, taxi revenue dropped to S$97.3m (-10.7% yoy, -8.4% qoq). Excluding impairments and government relief, 3Q21 operating profit underperformed at a loss of S$8m vs a S$2.1m
loss in 2Q21. Taxi rebates have now been extended to end-Nov 21 and increased to 25% (20% in 2Q21). Based on statistics from Singapore’s Land Transport Authority, CD’s taxi fleet continued its downtrend, dropping to 9,350 in Aug 21. However, management noted that utilisation rate remains stable and expects the return of tourists from Vaccinated Travels Lanes to help boost taxi ridership.

STOCK IMPACT

Withdrawn Australian IPO but operations resilient down under. CD has halted its planned IPO for CDG Australia (CDGA), due to challenging market conditions and the pursuit of other strategic options. It was noted that the IPO withdrawal would have no material impact on 2021 earnings and operations. Using 1x P/B for CD’s Australian assets, our SOTP target price would be S$2.00, similar to our current PE-based target price. CDGA’s financials were also released, which showed that in spite of COVID-19 lockdowns, 2021 revenue and net profit are forecasted to grow by 4.0% yoy and 14.0% yoy respectively, with 2022 also set to see single-digit growth.

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Higher transport fares. Singapore’s public transport council announced that bus and train fares in Singapore are set to increase at end-21. It decided to grant the maximum allowable fare adjustment quantum of 2.2% to help operators mitigate the costs of running public transport services. Fares for adult commuters will increase by 3-4 S cents depending on distance; concessionary groups will go up by 1 S cent per journey while the rest remains unchanged. We opine that the fare hike would help boost CD’s public transport revenue as tourists start to return and passenger volumes recover.

New risk-profit sharing model. SBS Transit (SBST) announced that the DTL will transition to the New Rail Financing Framework Version 2 (NRFF V2) as of Jan 22 to Dec 32.Currently under NRFF V1, DTL bears significant commercial risk as compared to NRFF V2. Under NRFF V2, profits from DTL would be capped at 5.0% EBIT margin with LTA sharing 85% of the spoils if exceeded, while 50% of any losses below 3.5% would be co-shared, limited to the annual licence charge. SBST would also release its rights to lease advertising spaces of the rail lines at end-23, after which LTA may lease to SBST for a fee. SBST has extended five existing bus contracts by three years at a lower service rate, with a loss of S$34m service revenue per year starting 30 Sep 22.

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EARNINGS REVISION/RISK

We adjust our net profit forecasts for 2021-23 as we cut our 2021 net profit forecasts by 16% with lower taxi revenue and higher operating costs, and increase our 2022-23 net profit forecasts by 5% each as we incorporate estimates from: a) higher fares, b) Auckland Rail earnings, and c) NRFF V2 into our forecasts. The financials implications of NRFF V2 include: a) lower bus service revenue, b) higher revenue from DTL, c) early replacement of SBST buses, and d) capex claims forfeited by SBST.

VALUATION/RECOMMENDATION

Maintain BUY with a slightly higher target price of S$1.99 (S$1.90). We use the same 19.2x 2022F PE, pegged to +0.5SD of CD’s five-year mean.

SHARE PRICE CATALYST

• Easing of stay-home measures, bus tender contract wins, earnings-accretive overseas acquisitions, regulatory changes in public transport.