Following land transport player ComfortDelGro C52 ’s (CDG) latest 1QFY2024 ended March, analysts are keeping positive on the stock, despite a soft set of results.
To recap, CDG’s earnings were 23.8% higher y-o-y at $40.6 million, marking its fourth consecutive quarterly improvement post pandemic. Revenue was 10.8% up y-o-y at $1 billion, led by broad-based improvement across its public transport and taxi businesses.
PATMI margin in the same period increased to 4% from 3.6%.
See more: ComfortDelGro reports 1QFY2024 earnings of $40.6 million, up 23.8% y-o-y
With that, analysts Andy Sim and Chee Zheng Feng from DBS Group Research are keeping their “buy” recommendation on CDG with a target price of $1.80.
The way Sim and Chee see it, the years 2023-2024 mark a strategic capital management shift for CDG to deploy its net cash position towards bolt-on (>$100 million) acquisitions. “We regard the two recent acquisitions announced – A2B and CMAC – as rational. They are earnings accretive and align with CDG's geographical and transport domain expertise. We believe the company will continue to seek out opportunistic acquisitions to complement its overall long-term growth strategy,” they say.
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While the analysts have raised concerns on the group’s larger than expected q-o-q contraction, they still believe CDG’s y-o-y growth trajectory should remain in subsequent quarters in FY2024 as it unfolds.
“We retain our above consensus FY2024 earnings growth of 24% y-o-y contributed mainly by its point-to-point (P2P) and the UK bus business segments. Within these, the P2P should continue to benefit from higher commissions, fares and improved mobility in Singapore, as well as recovery in China post a seasonally slower 1Q,” say Sim and Chee.
Similarly, Maybank Research is reiterating its “buy” call and $1.60 target price on CDG.
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Analyst Eric Ong notes that in view of the seasonally weak first quarter, he has deemed core Patmi of $40.6 million to be roughly in line with his and market expectations. Net profit margin improved by 0.4 percentage points (ppt) to 4% on the back of stronger net interest income with interest rates set to remain higher-for-longer.
On April 2023, CDG had said it will partner Gojek to introduce a cross-dispatch model allowing jobs from either platform that are not taken up to be sent to the other platform.
“This will help to tackle driver shortage and enhance reliability in the point to-point industry. The tie-up means drivers will be able to earn more, owing to more rides being available, without having to download any additional app,” says Ong.
Both companies will also explore other areas of partnerships, which include electric vehicles (EVs) and other revenue opportunities, as well as areas such as insurance, driver training and vehicle maintenance.
Meanwhile, CGS International continues to rate CDG “add” with a target price of $1.70, as analyst Ong Khang Chuen expects CDG to deliver strong EPS growth of 15% y-o-y in FY2024, while providing a decent dividend yield of 5.4%.
While he shares similar sentiments with the street about the slow 1QFY2024, Ong is upbeat on the group’s UK business being a bright spot for FY2024. “We expect further margin recovery for CDG’s UK business in FY2024 on bus service fee indexation and tender environment in London remaining favourable,” he says.
In April, CDG was awarded $720 million worth of contracts to operate a public bus service in Manchester (starting Jan 2025). “We believe this marks the first step in a trend of regions in the UK retaking control of bus services under public authority, and we see more tender opportunities for CDG in the UK over the next three to five years,” says Ong.
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Assuming 20-30% net gearing, CDG has debt headroom of a further $1.2 billion-$1.7 billion, allowing it to carry out more earnings-accretive M&As in adjacent businesses.
Hold on
On the other hand, UOB Kay Hian has downgraded its call on CDG to “hold” from “buy” previously with a lower target price of $1.56 from $1.72.
Analysts Llelleythan Tan and Heidi Mo are less optimistic on the stock, as it lacks near-term catalysts.
In the 1QFY2024 results, the analysts note that despite improved rail ridership and higher fares, the public transport segment suffered from lower contract margins in Australia and increased operating costs. The taxi segment benefitted from higher commission and platform fees, offset by lower booking volumes.
However, they do take into account that 1Q is a seasonally weaker quarter and has shown q-o-q decline in revenue, core operating profit and headline Patmi. “However, 1QFY2024 core operating margin fell 2.0 ppt q-o-q, a negative surprise given that a full quarter’s contribution from increased taxi commission rates and higher rail fares in 1QFY2024 would have boosted overall margins, in our view,” say the analysts.
The way Tan and Mo see it, the group has had a weak start to 2024, as operating profit came in weaker than expected, dragged by inflationary cost pressures and lower margins from bus contract renewals in Australia. Little tailwinds are also left for the rest of the year, but 2HFY2024 is expected to see better seasonal operating performance, specifically from the group’s UK bus chartering business, while UK bus contract renewals, which are ongoing, could lead to better margins for the rest of the year.
While the analysts have recognised robust growth in the group’s taxi segment, it has been offset by stiff competition from ride-hailing peers. “Moving forward to 2QFY2024, we expect the taxi segment to continue its upward growth momentum, supported by higher platform fees and booking commission, coupled with new contributions from the A2B acquisition coming through,” say the analysts.
As at 11.55am, shares in CDG are trading at $1.43.
