Latest fare hikes to have limited impact on ComfortDelGro’s earnings

On Sept 18, the Public Transport Council announced that it has allowed a 7% increase in public transport fares, following the annual fare review exercise. From December onwards, adult fares are expected to increase by 10 cents for up to 4.2km and 11 cents for distances beyond that. The hike is the highest increase recorded since and is the first exercise after the council adjusted its fare formula in April to factor in inflation and changing consumer patterns.

CGS-CIMB’s analyst Ong Khang Chuen remains neutral on the fare hike as the mechanism “essentially functions to allow SBS Transit [and] CDG to pass on the higher costs albeit at a lagged basis”, he tells The Edge Singapore.

While the higher fares could lift CDG’s revenue, the impact on its bottom line will be more muted as the cost base — fuel and manpower — will continue to grow in tandem in 2024, he adds.

That said, the recovery of SBS’s rail ridership should contribute positively to CDG’s overall figures. The segment is also likely to achieve profitability by 2HFY2023, notes Ong.

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Thanks to the overall earnings growth, there is room for CDG to pay out higher dividends per share (DPS) in FY2024, says Ong, who has kept his “add” call and target price unchanged at $1.47.

PhillipCapital’s analyst Paul Chew, while similarly positive on the move, also sees a limited direct impact on CDG’s bottom line following the fare hike. The hike is to reflect the higher costs for electricity fees and wages and is not meant to increase margins for CDG and SBS, says Chew. “For buses, the company is paid on a fixed fee per kilometre, with cost pass through,” he tells The Edge Singapore.

Instead, the upside for CDG in FY2024 is expected to come from its UK bus operations, thanks to the higher operating fees it can collect. Higher margins from its taxi business and higher volumes from its rail operations could also help raise dividends for FY2024, reasons Chew, who is keeping his “buy” call and $1.57 target price for now.

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DBS and Maybank more bullish on CDG’s prospects

Meanwhile, the team at DBS Group Research and Maybank Securities’ analyst Eric Ong are more bullish about CDG’s prospects, with DBS noting that the 7% fare hike is higher than their expectations of a 3% hike in FY2024.

With the hikes, both DBS and Maybank’s Ong estimate that SBS is likely to see a $20.9 million increase in its annual revenue. Of that sum, the company will have to contribute 15% of the expected increase towards the public transport fund. “We estimate that SBS will see a bottom line improvement of $14.7 million, which will translate to $11 million at CDG level [with] all else constant,” writes the DBS team.

With all things equal, Ong also sees CDG reaping an additional contribution of $11 million or over 5% to the group’s overall earnings in FY2024.

In its Sept 19 update, DBS believes that the hike will allow SBS’s train systems to achieve profitability in FY2024, especially considering that its average daily rail ridership for August reached its pre-Covid-19 levels. The higher number of rail riders should “allay [the] market’s scepticism that ridership will not return to pre-Covid due to work-from-home phenomenon,” says DBS.

DBS notes that the previous fare hike for 2023 was just 2.9%, significantly below the maximum allowable quantum of 13.5%. “This was likely to tame high inflation and weak economy expected in 2023, which turned out as expected. For 2024, a significantly higher allowable fare hike of 7% is likely a signal of the government’s outlook of easing inflation and improved economic conditions such that commuters are better positioned to absorb the higher fare increases,” DBS surmises.

Overall, the DBS team sees that the fare hike is a “positive development” as it allows CDG to reduce its reliance on support from the government. The move also signals a “path to higher margins with further high fare hikes in the cards should the economy remain sound”.

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Maybank’s Ong sees that the hike will have a “slightly positive impact” on CDG’s share price. The larger-than-expected hike itself could “potentially continue with the Public Transport Council again deferring a bulk (remaining 15.6%) of the fare adjustment quantum to future fare review exercises,” he says.

However, in spite of the fare hike, SBS’s trains will continue to face inflationary pressure from a tight labour market and higher energy prices in the near-term.

On dividends, Ong sees CDG maintaining its payout ratio of 70% to 80% of its patmi in FY2024.

DBS has kept its “buy” call with an unchanged target price of $1.65, which is the highest among its peers so far.

Ong has also kept its “buy” call with an unchanged target price of $1.50.

RHB increases TP to $1.46

RHB Bank Singapore’s analyst Shekhar Jaiswal has kept his “buy” call with a higher target price of $1.46 from $1.40 previously.

“The 7% fare increase and additional subsidy support from the government should enable SBS Transit to cover the rise in operating costs and help report a slightly better profit in FY2024. This should boost CDG’s FY2024 - FY2025 profit by 3%,” he writes.

As it is, SBS’s rail business has already reversed from its $51 million loss in FY2021 to a small profit of $1.2 million in the 1HFY2023 largely on the back of “rapid improvements” in its ridership, the analyst notes.

Year-to-date (ytd), Jaiswal points out that SBS’s rail ridership is now only 4% below its pre-Covid-19 level, offering limited upside to ridership levels in 2024.

Overall, the analyst maintains that CDG should report continuing improvement in profit thanks to higher overseas public transport earnings, marginally higher rail ridership in Singapore and better taxi earnings.

“Its strong yield should also provide good support for its share price,” he writes.