UOB Kay Hian analysts Llelleythan Tan and Heidi Mo are maintaining their “buy” call on ComfortDelGro C52 (CDG) at a lowered target price of $1.66 from $1.69 previously, as the transport operator has decided to keep its 10% taxi rental rebates from 2024 onwards which came as a “slight negative” surprise. The analysts’ target price remains pegged to the same 15x FY2024 price-to-earnings ratio (P/E), CDG’s average long-term P/E.
“We did not expect any near-term changes to the 10% daily taxi rental rebates given that CDG’s daily taxi rentals are almost double that of peers. However, we did not expect the 10% rental rebates to become permanent from 2024 onwards and expected a reduction sometime in 2HFY2024/FY2025,” write Tan and Mo in their Jan 11 report.
“For CDG’s 5% taxi commission rate, we expected potential upward revisions in 2024 as it was lower than that of major competitors like Grab (variable between -10% to 25% depending on distance to passenger pick-up) and GoJek (10% till end-2024, 15% thereafter),” they add. “Based on our estimates, every 1% increase in CDG's taxi commission rate will raise our 2024 taxi core operating profit and overall annual net profit estimates by around 4% - 5% and 2% - 3% respectively.”
However, this is slightly mitigated by the increase in CDG’s taxi commission rate, which is now from 5% to 7% from a flat 5% for online- and phone-booked taxi ride commission rates previously.
Contract tender
Separately, CDG’s subsidiary, SBS Transit (SBST), announced in the 4Q2023 that its Seletar bus package has been put up for tender by the Land Transport Authority (LTA).
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Originally scheduled to run from March 2018 to March 2023, the contract had been extended by two years to March 2025.
“The tender is set to close on Feb 29 and expected to be awarded sometime in 3Q2024. Looking at the results of the previous tenders for the Bukit Merah and Jurong West bus packages, we reckon that SBST is likely to retain its Seletar bus package, given that price was a major factor in the decision-making process,” note Tan and Mo.
The analysts add that as SBST currently operates the Seletar bus package, existing economies of scale would “likely translate” to cost efficiencies for SBST, resulting in lower operating costs and the ability to bid more competitively.
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They expect SBST to win the tender for its Seletar bus package, albeit at lower operating margins, while the loss of the contract would result in an expected 9MFY2025 profit after tax and minority interests (patmi) of around $3 million to $4 million.
Following the Public Transport Council’s (PTC) annual fare review, bus and train fares in Singapore have increased by up to 7% starting Dec 23, 2023.
“Despite being more than double 2022’s 2.9% hike, the upcoming fare hike is only a portion of the maximum allowable fare adjustment of 22.6%. It is expected that the remaining 15.6% would be deferred to future annual fare review exercises, implying further fare adjustments during 2024 to 2025,” write Tan and Mo.
They continue noting that data from the PTC points to a $20.9 million increase in annual revenue for SBST, which is 74.4% owned by CDG.
Given that there are no incremental operating costs with the fare hike, the analysts reckon that this would lead to higher margins for CDG’s public transport segment and flow straight to the bottom line.
Based on their estimates, Tan and Mo opine that the upcoming fare hike would increase CDG’s FY2024 to FY2025 overall net profit by around $10 million, which they have already incorporated in net profit into their estimates.
UK bus contracts
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With 30% of CDG’s UK bus contracts expected to undergo cost indexation within the next two quarters, the analysts reckon that there would be margin expansion moving into 4QFY2023 or 1HFY2024, boosting segmental profitability.
They add: “Also, given increasingly rational competition post-Covid-19 in the UK, 10% of CDG’s UK bus contracts were renewed at healthier margins in 3QFY2023 and we expect the same for upcoming contract renewals in 4QFY2023.”
Estimates
Overall, Tan and Mo estimate CDG’s FY2023 segmental annual revenue and core operating profit at $2,973 million, a 3% y-o-y increase, and at $122 million, which is stable y-o-y, respectively, driven by a strong 4QFY2023.
“For 4QFY2023, we expect segmental revenue to improve by 6.1% y-o-y and 5.3% q-o-q, and core operating profit to improve by 142.5% y-o-y and 12.8% q-o-q, backed by favourable tailwinds,” conclude the analysts.
Meanwhile, on CDG’s taxi front, Tan and Mo estimate an annual revenue and core operating profit of $578 million, 4.2% y-o-y growth, and $104 million, a 49.5% y-o-y) growth, respectively, driven by the recently implemented platform fees and lower daily rental rebates in 2HFY2023.
They continue: “Like the public transport segment, we expect 4QFY2023 taxi revenue to improve by 6.9% y-o-y and 3.2% q-o-q and core operating profit to improve 38.9% y-o-y and 15.5% q-o-q.”
Based on the analysts’ estimates, every 1% increase in CDG’s taxi commission rate would raise FY2024 annual taxi core operating profit by around 4% to 5% and their FY2024 overall annual net profit estimates by 2% to 3%.
For FY024, Tan and Mo expect the group's annual revenue and core operating profit to be at $608 million, a 5.2% y-o-y growth, and $134 million, a 28.6% y-o-y growth, respectively.
The analysts have kept their FY2023 patmi estimates unchanged while making slight downward adjustments to our FY2024 to FY2025 patmi forecasts by 2%.
“Despite increased profit contributions from the two percentage increases in taxi commission rates, we cut our FY2024 to FY2025 earnings as we increase both our FY2024 to FY2025 daily taxi rental rebate assumptions to 10% respectively, given that we initially expected a reduction in rental rebates in 2HFY24/FY2025 as mentioned earlier,” they write.
The analysts' new FY2023, FY2024 and FY2025 patmi forecasts are a respective unchanged $182.8 million, a reduced $233.6 million from $238.4 million previously, and a reduced $266.5 million from $270.3 million previously.
Share price catalysts noted by Tan and Mo include bus tender contract wins, earnings-accretive overseas acquisitions and an increase in taxi commission rates.
As at 12.40 pm, shares in CDG are trading at one cent lower or 0.70% down at $1.41 on Jan 11.
