Analysts from CGS-CIMB Research, Citi Research, DBS Group Research, Maybank Securities, OCBC Investment Research (OIR) and RHB Bank Singapore have all kept their “add” and “buy” calls on ComfortDelGro (CDG) C52 after the transport operator reported earnings of $78.5 million for the 1HFY2023 ended June.
On a y-o-y basis, CDG’s earnings were down by 31.9% due to the recognition of the gain from the sale of the Alperton property in London in the 1HFY2022.
Without the one-off gain, CDG’s earnings were down by 7.4% y-o-y due to higher operating costs. On a h-o-h basis, 1HFY2023 earnings increased by 35.8% while its 2QFY2023 earnings rose by 39.3% q-o-q to $46 million, reflecting a recovery from the pandemic years.
Except for Citi, which has kept its target price unchanged at $1.32, CGS-CIMB, DBS, Maybank, OIR and RHB have increased their target prices as they see a recovery underway for CDG.
CGS-CIMB analyst Ong Khang Chuen has raised his target price to $1.47 from $1.35 as CDG’s 2QFY2023 earnings stood ahead of his preview expectations of $40 million.
Going into the 2HFY2023, the analyst also sees further earnings improvement, which is estimated to grow around 17% h-o-h or 58% y-o-y.
“Our target price of $1.47 is based on 16.2x FY2024 P/E (0.5 standard deviation or s.d. above CDG’s five-year historical average), from 15.4x previously,” he writes.
To him, CDG’s taxi segment is slated to become the “bright spot” in FY2023 as the segment’s ebit surged by 105% y-o-y and 54% q-o-q in the 2QFY2023.
In the 2HFY2023, the analyst sees this segment’s revenue to grow by another $11 million assuming that its ride volumes remain unchanged from 1HFY2023.
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On Grab’s proposed takeover of Trans-Cab, the management at CDG aren’t worried, seeing it as a sign that the taxi and private hire vehicle (PHV) businesses can co-exist.
“[CDG’s] focus remains on upholding quality service while diversifying driver supply to include more PHV drivers,” he writes.
CDG’s UK operations are also expected to return to ebit positive in the 2HFY2023 on better cost pass-through.
“Recall that CDG granted its London Metroline public bus drivers an 11% pay increase, with a 10% increase in back pay in December 2022, to avert strike actions. With annual indexation of service fees on route anniversary ([over] 40% completed in 1HFY2023), the higher costs absorbed by CDG are being gradually passed on to the government,” he writes.
“CDG anticipates new contracts in the UK to be tendered for at significantly higher service fees ([around] 25-30%) to cater for cost increases, which helps with margin repair overall. CDG continues to pursue overseas public transport tenders via strategic alliances,” he adds.
“Valuation is currently undemanding at 1 s.d. below historical mean,” he continues.
In Ong’s view, re-rating catalysts include further adjustments in taxi monetisation and tender wins. Downside risks include slower margin recovery due to inability to pass on costs, and negative forex translation impact given the strong Singapore dollar, he says.
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DBS analysts Andy Sim and Chee Zheng Feng have upped their target price to $1.65 from $1.62 as CDG’s 1HFY2023 revenue and normalised patmi formed 47% of their FY2023 estimates, which is deemed “in-line” given their expectations for stronger 2HFY2023 performance. CDG’s 2QFY2023 earnings also came in within their expectations.
“The key highlight from current results is that 2QFY2023 patmi saw strong sequential improvement, rising 39% q-o-q due to strength in public transport and taxi & private hire segments compared to 1QFY2023. This indicates that the group’s financial performance could have bottomed out in 4QFY2022 and is now on the rebound,” write Sim and Chee.
The introduction of CDG’s platform fee for its app, Zig, is another plus. The 70-cent fee addition is expected to deliver $15 million to $18 million annualised top-line growth and $12 million to $15 million annualised bottom-line contribution, estimate the analysts.
On the other hand, Sim and Chee note that the group’s taxi and private hire segment needs to prove its competitiveness to drive a re-rating in its earnings.
“Given taxi fleet attrition over the years and an aging driver demography, investors are concerned about CDG’s prospect to deliver top-line growth and profitability recovery,” they write.
“We believe fleet attrition is tapering off, based on recent data. In addition, the newly introduced commission model will make up for loss of revenue from a smaller fleet size,” they add. “We see significant top-line and profitability growth headroom from booking commissions given the current low commission rate of 5% (versus 20% for Grab).”
In their view, key risks to their view are taxi fleet attrition outpacing gains in booking commission, leading to lower-than-expected taxi segment earnings. Persistent inflation in the UK, which will lead to further losses due to the indexation lag effect, is also another risk.
Maybank analyst Eric Ong has upped his target price to $1.50 from $1.45 previously as he notes that CDG’s earnings for the 2QFY2023 validates his earlier view that the group has “turned the corner and is in the midst of an upturn”.
“Looking ahead, the group’s UK public transport turnover is likely to rise further as contractual indexation mechanisms put in place will partially compensate for previous driver pay increases,” he says.
“Management also expects any new/renewal contracts will be tendered at significantly higher service fees to cater for higher operating costs and more rational bidding by other operators,” he adds.
Ong has also raised his earnings per share (EPS) estimates for the FY2023 to FY2025 by 13% to 15% after factoring in the platform fees for Zig.
“We think there is also headroom for CDG to raise its commission rate (currently 5% versus peers of 15% - 20%) along with a healthier competitive landscape,” he writes.
OIR analyst Ada Lim has upped her fair value estimate to $1.31 from $1.25, the lowest of the list of brokerages listed here.
The analyst is also less upbeat on CDG’s prospects, noting that there needs to be “more meaningful catalysts” to call for a “potential rerating for the stock”.
“We see these recent developments as part of CDG’s plan to defend its core business and to expand into new cities within existing countries / new countries, with Stockholm currently in its sights. In an update on its growth strategy, CDG also shared that it is looking into future growth areas such as electric vehicle (EV) charging, EV-as-a-Service, and autonomous vehicle (AV),” notes Lim.
“However, given that these revenue streams are still too immaterial to warrant their own segment in CDG’s new reporting format, and the absence of concrete targets, we continue to wait on the sidelines for a more meaningful catalyst to call for a potential rerating for the stock,” she adds. “With a change in analyst, we have updated our model assumptions and adjusted our patmi forecasts upwards slightly to capture the recent positives.”
RHB analyst Shekhar Jaiswal has raised his target price to $1.40 from $1.35 even though CDG’s 1HFY2023 results stood below his estimate.
“We remain optimistic about the continued increase in profit amidst an improving outlook for its UK public transport and Singapore taxi & private hire businesses. We raise FY2024 - FY2025 earnings by [around] 4%,” he says.
“CDG has updated its business segments to fit in with its management structure and also updated its dividend policy to pay out at least 70% of patmi (from an earlier 50%). This should provide good support for its share price,” he adds.
Citi analyst Kaseedit Choonnawat expects CDG’s sequential earnings recovery driven primarily by the trailing bus fee indexation mechanisms in the UK and improvements of domestic mobility in Singapore.
In his view, CDG’s Australia business should remain stable in 2HFY2023 as major tenders have been concluded in 1HFY2023.
“CDG continues to eye new rail contracts such as Stockholm, Sydney Metro West and a few other projects in Europe most likely under joint venture structures, similar to the recently won Paris rail contract (CDG owns 20% in the joint venture),” he says.
Shares in CDG closed 1 cent lower or 0.78% down at $1.28 on Aug 17.
