UOB Kay Hian analysts Llelleythan Tan and Heidi Mo have kept their “buy” call on ComfortDelGro C52 (CDG) as the transport operator looks set to post a “strong” set of results for the 1QFY2024 ended March 31.
“[This is] driven by favourable tailwinds for both the public transport services and taxi segments. Higher fares and rail ridership, coupled with increased taxi commission rates, are set to boost margins,” write Tan and Mo in their report dated March 28.
For the month of January and February, CDG’s rail ridership accounted for 100.4% and 104.5% of 2019 pre-pandemic levels respectively, the analysts note.
In the 1QFY2024, CDG’s 74.4%-owned subsidiary, SBS Transit, is likely to see its revenue grow by $20.9 million thanks to the higher rail fares. With no incremental operating costs, the fare increase is likely to result in higher margins for the group’s public transport segment.
“Based on our estimates, the upcoming fare hike would increase CDG's FY2024 – FY2025 overall net profit by around $10 million,” say Tan and Mo.
“We had already incorporated the increase in net profit into our estimates previously. Also, management noted that UK bus contract renewals are still undergoing contract renewals that would lead to better margins in 1HFY2024,” they add.
Higher estimates for taxi segment
With the group’s higher taxi booking commission rate of 7% from 5% previously, the group will also benefit from the increase in ride-hailing adoption. In January, 87.7% of the total point-to-point (P2P) average daily trips in Singapore were ride-hailing trips, 0.4 percentage points higher than 87.3% in December 2023. The higher rate was implemented on Jan 1.
On the other hand, street-hailing trips, which are exclusive only to taxi drivers, have been on a constant downtrend and was at its lowest in January, the analysts point out.
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To this end, CDG’s taxi segment is expected to see strong operating profit growth thanks to the higher taxi commission rates and contributions from Zig’s platform fees that were implemented since 3QFY2023.
“Based on our estimates, every 1% increase in CDG's taxi commission rate will raise CDG's annual taxi core operating profit and overall annual net profit estimates by around $5 million - $6 million (1% x 32 million taxi rides x $20 average cost of a taxi ride) and $3 million - $4 million respectively,” say the analysts.
“We have already incorporated the increase in net profit into our estimates,” they add.
The lower discounts for taxi rentals in Singapore and China, along with higher fleet utilisation in China would also help support margins.
“We understand that CDG's China taxi rental rebates have been removed since the complete relaxation of restrictions in 1QFY2023, which contributed to higher segmental margins in 4QFY2023,” they write.
A2B acquisition
CDG also looks set to see earnings accretion from the acquisition of A2B Australia, the second-largest P2P personal mobility player in Australia. The group currently owns 9.25% of A2B and has offered to pay A$1.45 ($1.30) for the remaining shares it does not own in the company. CDG’s offer values A2B at A$182 million. The acquisition is estimated to cost CDG around A$165 million and will be funded through existing cash and bank facilities.
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The group, on March 25, announced that 97.3% of A2B’s shareholders voted in favour of the proposed acquisition, paving the way for the completion of the acquisition. The acquisition is targeted to be completed in April.
A2B, which will be parked under CDG’s taxi segment after the acquisition, is likely to see its contributions come through from 3QFY2024 onwards. The move is also tipped to drive a growth in earnings for the group’s taxi segment.
“As A2B's pre-Covid-19 (FY2018 – FY2019) operating profit was around A$20 million, we reckon that there is still potential upside and recovery given that FY2023 operating profit was only A$10.5 million,” say Tan and Mo.
Higher target price, earnings
With these positives, the analysts have upped their patmi estimates for the FY2024 to FY2026 by around 4% to 5% to $233.1 million, $251.0 million and $276.5 million for the FY2024, FY2025 and FY2026 respectively. The new updates have factored in the contributions from the A2B acquisition, as well as increased margins.
The analysts have also upped their target price estimate to $1.66 from $1.58 before. The new figure is pegged to the same valuation of 15 times CDG’s FY2024 P/E, which is the group’s average long-term P/E. The new target price is largely due to the analysts’ new estimates.
“With improving fundamentals, a lush 5.8% dividend yield and a robust balance sheet, we reckon that most negatives have already been priced in. Despite the recent strong share price performance, we opine that there is still upside at current price levels,” they write.
As at 2.07pm, shares in CDG are trading flat at $1.40.
