With expectations of higher earnings, CGS International analyst Ong Khang Chuen has kept his “add” call on ComfortDelGro C52 (CDG) with an unchanged target price of $1.70.
His target price is based on 16.2 times FY2025 price-to-equity ratio (P/E), at 0.5 standard deviations (s.d.) above CDG’s five-year historical average.
“We think the Labour Party’s win in the UK General Election reaffirms our view that there will be ample new bus tender opportunities in the UK over the next five years," says Ong in his July 5 report.
According to CGSI's UK transport analyst, Gerald Khoo, the Labour party has “long hinted” at its preference for the re-regulation of local bus services outside of London, and the party’s manifesto included plans for devolved transport responsibilities to mayors to create unified and integrated transport systems, and to empower them to franchise bus services.
“Greater Manchester pioneered the switch to a bus franchising model in FY2023, and we estimate ComfortDelGro’s UK-subsidiary Metroline won around 30% of tendered bus routes despite no prior presence in the city,” writes Ong.
“We see more tender opportunities worth GBP1.2 billion to GBP1.4 billion ($2.1 billion to $2.4 billion) per annum (p.a.) from regions including Liverpool and West Yorkshire over the next five years; and estimate each contract win of GBP100 million p.a. could lift our earnings per share (EPS) forecasts by 3% to 5%," he adds.
With this, Ong forecasts that CDG UK earnings before interests and taxes (ebit) should rise by at least $15 million per year over FY2024/FY2025 from more London contract renewals at higher margins, and its Manchester contribution starting in January FY2025.
“We forecast CDG to post a profit after tax and minority interest (patmi) of $52 million in 2QFY2024, at 29% higher q-o-q and 14% more y-o-y,” writes the analyst.
He sees CDG’s overall earnings growth driven by positive contribution from more London bus contracts renewed at higher margins, improvements in Singapore rail ridership, and stronger taxi segment margins.
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Ong adds: “We anticipate further patmi growth in the seasonally stronger 3QFY2024, especially as more than half of the annual profits from CMAC (which CDG acquired in early FY2024) are typically generated during the summer travel season in the UK.”
While the company has had “a slower start” to the year, Ong believes CDG remains on track to meet his FY2024 forecasts, as its earnings ride on UK tailwinds, while providing a decent dividend yield of 5.7% in FY2024.
“We also observed that CDG has been conducting share buybacks at $1.33 levels over the past month,” concludes Ong.
As at 12.17pm, shares in ComfortDelGro are trading two cents higher or 1.49% up at $1.36.
