SINGAPORE (Mar 31): ComfortDelGro’s share price has plunged some 37% amid a worsening Covid-19 pandemic. But the worst is far from over.
Singapore’s largest taxi operator is about to book full-year losses for FY2020 for the first time ever, an inevitable outcome from the group’s decision to extend its daily rental relief measures for taxi hirers till end-September.
The extension is expected to set the group back by an astounding $80 million.
On Monday, the group had sounded its profit warning along with an announcement that it will match the government’s Special Relief Fund (SRF) amount of $10 per day per taxi till September, and is also preparing to extend its additional $26.50 daily relief amount till then depending on the prevailing conditions.
ComfortDelGro taxi hirers are currently receiving a total of $46.50 daily in rental relief for each taxi. This comprises $36.50 from the company, and $10 from the SRF. The relief amounts from ComfortDelGro were intended to be reduced gradually in April and May.
See: Extended rental relief measures worth $80 mil to push ComfortDelGro Taxi into the red in FY20
In a Tuesday report, CGS-CIMB Research analyst Ong Khang Chuen terms this move a “crucial” one for the group to retain its taxi fleet through the Covid-19 crisis.
“Taxi drivers are suffering from lower income due to fewer tourist arrivals and an increase in the number of people working from home,” says Ong.
“With the recent enhanced advisories by the government to encourage people to work from home and avoid non-essential travel, we believe that the taxi idle rates could further increase in the near term,” adds Ong.
To be sure, ComfortDelGro has noted that taxi drivers have suffered as much as a 42% plunge in net income since the outbreak hit Singapore in end-January. Even after accounting for rental rebates, the figure amounts to some 22%.
DBS Group Research analyst Andy Sim shares that the taxi segment alone accounted for some 25% of the group’s operating profit in FY2019, of which 70% was attributable to Singapore operations.
He expects that the group’s taxi fleet of 10,700 taxis could have shrunk in tandem with the challenging situation. And according to Sim, would in turn shave some 4% off the group’s operating profit in FY2020.
Forecasts slashed
In light of the challenging business environment, analysts have taken to adjusting their forecasts.
DBS Group Research has slashed its FY2020F and FY2021F earnings by 19% and 11% respectively, which are at the low end of consensus.
“We believe consensus has yet to factor in the rental rebates and the impact from the pandemic,” says DBS’s Sim.
“We project earnings to dip by 16% y-o-y in FY2020F, to $224 million before rebounding 15% in FY2021F,” adds Sim.
Although the counter’s low price could beckon to investors, Sim says that there are too many uncertainties for the share price to re-rate as the Covid-19 looms.
CGS-CIMB has also slashed its FY2020-2022F earnings per share (EPS) forecasts by 13.4%-38.6% to account for higher taxi rebates and idle rates, as well as lower earnings contributions from the group’s overseas businesses.
“For the taxi segment, we currently forecast a taxi idle rate of 20% and a 15% y-o-y average decline in taxi rental income for FY2020F,” says Ong.
“Specifically, we forecast ComfortDelGro’s daily taxi rental rebate to stay at $36.50 until Jun, before declining to $20 in August and $10 in September,” he adds.
Public transport operations
While the road remains bumpy for ComfortDelGro’s taxi business, analysts appear a little more optimistic on the public transport sector which accounted for 74% and 54% of the group’s revenue and operating profit figures in FY2019.
“The major profit contributors were Singapore, Australia, followed by the UK,” says Sim.
“Within these areas of operations, revenue and earnings drivers are based on tenders for routes, coupled with ComfortDelGro meeting the service requirements set forth by the authorities,” he adds.
On a local front, Sim notes that the Bus Contracting Model, which has been in place since September 2016, has transferred the fare revenue risk to the government, with the exception of rail operations.
Yet, CGS-CIMB’s Ong says that although Singapore’s public transport segment will undoubtedly be impacted, the impact will not be as great.
“The impact of lower ridership on the public transport segment will mainly be on ComfortDelgro’s rail business (ridership declined by 9.3% in 2MFY2019), in our view, but the railway operational framework offers some level of protection against revenue risks arising from uncertainties in ridership and fares,” says Ong.
Ong, however, warns that the lockdowns imposed by ComfortDelGro’s overseas markets could have further adverse impacts on the group.
“Outside of Singapore, ComfortDelGro’s other key markets, specifically the UK and Australia, have also entered into various states of lockdown beginning last week, which could further dampen ridership numbers,” says Ong.
Overseas presence
Over the years, ComfortDelGro has seen its revenue from overseas contributions increase, with operating profit standing at 34% in FY2019 compared to 26% in FY2009.
And moving forward, the group is looking to ramp up its overseas presence further.
“Management had previously indicated a target of further increasing contribution of overseas revenue to an even mix with Singapore,” says DBS’s Sim.
“This is likely to be achieved through organic growth (winning of tenders) and inorganic sources, such as bite-sized acquisitions,” he adds.
Sim also notes that the group’s low gearing provides it with ample headroom for overseas acquisitions, to supplement growth and further diversify its geographical exposure outside Singapore.
Ong agrees, saying that further accretive acquisitions are not only a growth catalyst for the stock, but could also bolster its share price.
“We still see plenty of debt headroom for CD; Its target cap of 30% net gearing implies that it could gear up by another $860 million to fund more acquisitions ahead,” he says.
Both DBS and CGS-CIMB are reiterating their “hold” calls on ComfortDelGro with a target price of $1.55. The latest target price means that DBS and CGS-CIMB have slashed their target prices by 31% and 25% respectively.
As at 12.37pm, shares in ComfortDelGro are trading one cent higher, of 0.68% up, at $1.49.
