CGS-CIMB has upgraded ComfortDelGro C52 from "hold" to "add", with a trio of catalysts that will help move the stock towards a fundamental inflection point for earnings recovery to take shape.
In his July 4 note, analyst Ong Khang Chuen expects the land transport operator to report y-o-y growth when it reports earnings for 2QFY2023 ended June, leading further into a stronger showing in 2HFY2023 of 65% gain y-o-y.
At current levels, the stock is trading at an undemanding valuation of -1 sd below the historical mean. Ong's revised target price of $1.35 is based on 15.4x FY2024 earnings, which is the company's five-year historical average, up from an earlier valuation multiple of 13.8x.
The first catalyst is a recovery in ComfortDelGro's taxi business, with EBIT estimated to increase by 50% y-o-y to $78 million for the full year FY2023.
Earlier this month, the company introduced a so-called platform for rides booked via its Zig app.
"We see the potential for commission rate increases in 4QFY2023 as the current industry landscape remains favourable for point-to-point transport players," writes Ong.
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Next, Ong expects the company's UK bus operations to improve, as it can pass through higher costs incurred to the UK government.
"We also understand that recent tenders for route renewal are carried out at a premium as operators factor in higher cost buffers given elevated inflation and uncertainties," he adds.
Last but not least, Ong sees room for ComfortDelGro to pay higher dividends, given the stronger fundamental performance seen this year, with potentially higher payouts contributed by itse separately-listed key subsidiary, SBS Transit.
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Ong notes that ComfortDelGro has been actively rewarding shareholders with its excess cash – on top of its 70% base payout ratio, it declared 3.87 cents special dividend for FY2022.
"We think a higher dividend payout ratio can be supported given its strong net cash position of $715 million and cash flow generation," he says.
Llelleythan Tan Yi Rong, in his separate note on July 5, has maintained his "hold" call and $1.27 target price.
While the company won the contract in Australia, potential loss of certain bus packages in Singapore by SBS Transit is an "overhang".
SBS Transit’s (SBST) Bukit Merah and Jurong West bus packages are set to expire in Nov 23 and Sep 24 respectively and have been put up for tender.
The tenders closed in Mar 23 and are expected to be awarded in 3Q23, and both packages could be awarded again to SBS Transit, or to two different operators.
This implies potential risks to ComfortDelGro’s near- to medium-term earnings, notes Tan.
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He estimates that if ComfortDelGro is re-awarded the two contracts at lower service rates would result in earnings dropping by 2-3% for both 2023 and 2024; the loss of both packages would cause earnings to drop by 3% and 10% respectively.
"As our base case, we have already factored the loss of both packages in our estimates," writes Tan.
From his perspective, the company is already fairly valued at current levels, despite improving fundamentals, a decent dividend yield and a robust balance sheet.
"Near- to medium-term earnings headwinds, margin compression and a lack of catalysts would cap share price performance, in our view.
"We recommend investors to take profit on any run-up in share price performance close to our target price. Our key rerating catalysts would be stable and strong margin expansion from the public transport segment," he adds.
