UOB Kay Hian is keeping its "buy" recommendation on ComfortDelGro (CDG) but with a lower target price of $1.77 from $1.83 previously.
Although analysts Llelleythan Tan and Heidi Mo are upbeat on strong earnings growth, the group has recently raised its taxi platform fees starting 2025 and is expected to face increasing competiition with two new ride-hailing competitors entering the market.
The group has increased its platform fee on its online booking app Sig by 30 cents to 50 cents from the start of 2025, in a respose to rising costs from the Platform Workers Act which would require platform companies such as CDG to contribute more to the Central Provident Fund accounts of platform workers, coupled with work injury initiatives and enhanced insurance coverage.
Following the increase in platform fees, CDG’s platform fees would increase from a flat fee of 70 cents to $1-$1.20 depending on distance travelled and travel time. Other domestic ride-hailing competitors such as Grab and Gojek have also increased their platform fees in response to the Platform Workers Act.
"Based on our estimates, we expect minimal earnings impact from the increased platform fees for CDG’s taxi segment," say Tan and Mo, who reckon that the increase in platform fee revenue would be largely offset by higher manpower costs incurred due to the Platform Workers act.
Furthermore, as ride-hailing becomes slightly more expensive sector-wide, they opine that CDG’s online booking volumes may be impacted as consumers switch to cheaper alternatives such as public transport.
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"Given that CDG’s online booking volumes have already been on a downtrend, we expect booking levels to continue trending downwards after the increase in platform fees," they say.
Meanwhile, Singapore's Land Transport Authority (LTA) announced that two new ride-hailing service providers, Geo Lah and Trans-cab Services, have been awarded one-year provisional licences. The provisional licences would allow the two new operators to fine-tune their operations before being considered for a full Ride-Hail Service Operator Licence. Also, existing major players such as CDG and Grab have had their respective licences renewed.
Tan and Mo expect the two new ride-hailing entrants to have a slight negative impact on CDG's taxi margins as domestic competition intensifies. "Given that most drivers are already on multiple service platforms, assuming competitive pricing from these new entrants, we expect CD’s declining booking volumes to fall further, leading to lower margins for CDG’s taxi segment as online booking commission drops," they say.
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Furthermore, LTA recently announced that the Tampines bus package which is currently being run by CDG’s subsidiary, SBS Transit, has been called for tender with results expected in 2H2025. The existing bus package is expected to expire in Jul 2026 and is likely to draw bids from both domestic and foreign operators, similar to recent past tenders in 2022-2023.
Besides the usual two-envelope process which takes into account both quality and price factors, the LTA also mentioned that it would evaluate proposals for electric bus operations. As a recap, the Tampines bus package was one of five bus packages which were extended at lower service fees as part of a deal made with LTA due to the shift in financing framework for the Downtown MRT line. The expiry of the other four packages have not been made known to the public.
"Like past tenders, we reckon that the upcoming Tampines bus package tender implies potential risks to CDG’s near- to medium-term earnings no matter the outcome. Even if CDG wins back the Tampines bus package, we expect lower margins due to competitive bidding," say Tan and Mo.
In their view, CDG’s incumbency advantage is likely to increase its chances of winning back the contract given the existing economies of scale and cost savings that would allow it to put in a competitive bid.
However, based on estimates, this would lead to a $2 million decline in the group’s 2026 public transport segmental operating profit as margins compress. If CDG loses the contract, the group is expected to experience around $4 million (a half year’s contribution) negative impact to its 2026 public transport segmental operating profit. "As our base case, we expect CD to win back the Tampines bus package," say the analysts.
Over in UK, Tan and Mo expect public transport to improve in 4Q2024. Management noted that the UK bus contract renewals are still ongoing, which would lead to a better margin profile for 4Q2024 and beyond.
"Excluding the consolidation of the Addison Lee acquisition, we maintain our expectations that margins for the UK business would continue trending upwards towards the high single-digit to low-teens percentage in the medium to long term, albeit at a gradual pace given that only 15-20% of contracts are renewed every year," they say. Also, seasonally higher scheduled bus chartering activities in 4Q2024 would boost segmental revenue and profitability.
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Closer to home, improving domestic rail ridership would help boost rail revenue y-o-y while bus revenues are set to drop for 4Q2024 due to the loss of the Jurong-West bus contract coupled with softer margins from the Australian business.
"Moving into 4Q2024, we expect stiff competition from ride-hailing peers to continue, leading to lower completed bookings and dragging down CDG’s overall commission on completed jobs," say the analysts. However, additional contributions from the A2B and the newly-completed Addison Lee acquisitions are expected to support the taxi segment’s upward growth momentum. However, due to acquisition costs, management noted that any significant earnings impact from Addison Lee would likely only come through in 1Q2025.
As at 3.50pm, shares in CDG are trading at $1.43.
