| • 7 June 2023 was an incredibly low day for ComfortDelGro as the stock sank to $1.02, the lowest in more than 15 years. That was even lower than during the Covid-19 period in 2020-2022 when many people worked from home -- which meant that the taxi and public transport services of ComfortDelGro were not in demand. • Emerging from the pandemic, ComfortDelgro's earnings in the last 4 quarters have been anything but excellent as it faced several headwinds such as higher operating expenses. • Well, the dawn seems to have emerged after the dark days -- the stock has been recovering in the past 4 weeks, hitting $1.20 yesterday. As outlined below, CGS-CIMB reckons there are reasons for the stock to rise further. |
Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA
| ComfortDelGro -- Time to hop on |
■ Upgrade to Add as we see a fundamental inflection point – we estimate CD’s PATMI returning to yoy growth in 2Q23F and a stronger showing in 2H23F.
■ Supported by stronger core earnings and potentially higher payout by subsidiary SBS Transit, we also expect higher base DPR (dividend payout ratio) by CD in FY23F.  |
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| Earnings recovery taking shape; upgrade to Add |
We upgrade ComfortDelgro (CD) from Hold to Add as we see a fundamental inflection point – we estimate its PATMI could return to yoy positive growth in 2Q23F (+3% yoy) and see an even stronger showing in 2H23F (+65% yoy) on multiple earnings catalysts highlighted below.
| STRONGER SHOWING |
 “We estimate its PATMI could return to yoy positive growth in 2Q23F (+3% yoy) and see an even stronger showing in 2H23F (+65% yoy) on multiple earnings catalysts.”-- Ong Khang Chuen, CFA |
Valuation is currently undemanding at -1 s.d. below historical mean.
Our TP of S$1.35 is based on 15.4x FY24F P/E (CD’s five-year historical average), from 13.8x previously.
Re-rating catalysts include further adjustments in taxi monetisation and tender wins.
Downside risks include slower margin recovery due to inability to pass on costs, and negative FX translation impact given strong Singapore dollar.
| Catalyst 1: Raising taxi monetisation to drive earnings growth |
We forecast taxi segment EBIT to rise 50% yoy to S$78m in FY23F. CD lowered its taxi rental rebate (Apr 23) and introduced platform fee for rides booked via its CDG Zig app (Jul 23) in Singapore; we see potential for commission rate increases in 4Q23F as the current industry landscape remains favourable for point-to-point transport players.
Recent newsflow of several world-renowned artistes adding and selling out additional shows in their Singapore concert series also helps create a virtuous cycle and reinforces Singapore as an entertainment destination for tourists, and we see CD as a beneficiary.
| Catalyst 2: Cost pass-through for UK public bus taking shape |
We expect CD’s UK operations to return to EBIT positive in FY23F (FY22: -S$10.4m) as cost pass through to government helps with margin repair.
Recall CD granted its London Metroline public bus drivers an 11% pay increase with 10% increase on back pay in Dec 22 to avert strike actions.
With annual indexation of service fees on route anniversary, the higher costs absorbed by CD are being gradually passed on to the government.
We also understand that recent tenders for route renewal are carried out at a premium as operators factor in higher cost buffers given elevated inflation and uncertainties.
| Catalyst 3: Higher DPR possible? |
| HIGHER |
| “We see room for higher base dividend payout ratio for CD (FY23F: 80%) given stronger fundamental performance this year.” -- Ong Khang Chuen, CFA |
We see room for higher base DPR for CD (FY23F: 80%) given stronger fundamental performance this year and potentially higher dividend payout from subsidiary SBS Transit (which has maintained 50% DPR despite turning net cash since FY20).
CD has been actively rewarding shareholders with its excess cash – on top of its 70% base DPR, it declared 3.87 Scts special DPS in FY22 on
1) property disposal gain, and
2) in honour of its 20th anniversary of SGX listing.
We think higher DPR can be supported given its strong net cash position of S$715m and cash flow generation.
Full report here
