The team at DBS Group Research is keeping its “buy” call on ComfortDelGro (CDG) C52 with an unchanged target price of $1.65 after the Public Transport Council announced that it will be increasing public transport fares by 7% on Sept 18.
“We believe this fare hike is a positive development as the company reduces its reliance on government support and signals a path to higher margins with further high fare hikes in the cards should the economy remain sound,” writes the team in its Sept 19 update.
The hike, which was made by the council after an annual fare review exercise, is higher than the 3% expected by the DBS team albeit lower than the 12% quantum generated by the revised formula in April 2023.
The hike means that adults will have to pay 10 to 11 cents more per journey from December 2023 onwards, which is the highest increase on record.
With the hike, CDG’s subsidiary, SBS Transit S61 , is expected to see a $20.9 million increase in its annual revenue. Of the sum, about 15% will go towards the Public Transport Fund. The Public Transport Council had previously determined that SBS and SMRT would contribute about 15% and 30% respectively to the fund upon the fare hike.
On this, the DBS team has estimated that SBS will see an earnings improvement of about $14.7 million, which will translate to $11 million at the CDG level should everything else remain constant.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
“We believe [that the] announced fare hike will allow SBS Transit’s trains to achieve profitability,” the team writes.
In FY2022, SBS’s train segment reported a loss due to significant increases in energy and labour costs. This was despite the government support that was provided at the time. The 2.2% revision that came into effect on Dec 26, 2021, didn’t help either.
“With the latest higher fare hike, we believe the train segment will likely be able to achieve profitability in FY2024, also on the back of higher train ridership,” the team adds, noting that SBS’s train ridership in August 2023 came back to pre-Covid-19 levels.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
“We noted that SBS Transit’s average daily rail ridership for the month of August 2023 has reached that of August 2019 and year-to-date (ytd) August is [around] 96% of pre-Covid. That should allay market’s scepticism that ridership will not return to pre-Covid due to work-from-home phenomenon,” the team continues.
The team at DBS also believes that the hike denotes a signal from the Singapore government that it expects 2024 to be a better year for the country’s economy.
“For 2023, the 2.9% fare hike was significantly below the maximum allowable quantum of 13.5%. This was likely to tame high inflation and weak economy expected in 2023, which turned out as expected. For 2024, a significantly higher allowable fare hike of 7% is likely a signal of the government’s outlook of easing inflation and improved economic conditions such that commuters are better positioned to absorb the higher fare increases,” it writes.
Shares in CDG closed flat at $1.28 on Sept 19.
