SINGAPORE (Jan 6): UBS and RHB are reiterating their “buy” calls on ComfortDelGro with target prices of $3.43 and $3.24 respectively in anticipation of higher earnings growth over the next few years.

In a report on Tuesday, UBS analysts Rachel Tan and Cheryl Lee opine that the transport company’s recently-announced acquisition of CabCharge Australia’s remaining 49% stake in ComfortDelGro CabCharge Pty Ltd (CDC), should be funded without significant balance sheet strain.

(See also: ComfortDelgro takes 100% control of Cabcharge)

While they expect Australian bus operating margins to continue facing pressure going forward due to higher labour costs and negative fuel indexation, the analysts estimate accretion to the ComfortDelGro’s PATMI to “more than offset lower margins”.

“Assuming 1Q17 completion [of the acquisition], we estimate incremental earnings of $11 million, or 3% of FY17 PATMI, after accounting for lower CDC operating margins,” they add.

As such, Tan and Lee now project the stock to offer 4.5% FY17E dividend yield, which is equivalent to a 70% payout.

On the other hand, RHB analyst Shekhar Jaiswal thinks ComfortDelGro’s dividend payout ratio could gradually rise to 75% over the next few years with over 10% earnings growth. This translaties into 5-6% yields in 2017-18F.

As the only publicly-listed stock offering exposure to the sector, the stock has been highlighted as one of RHB’s top “buy” recommendations with a target price of $3.24.

(See also: Singapore’s land transport sector is revving up for a smooth ride)

“Implementation of the government contracting model (GCM) for the Singapore bus business, steady growth in the Singapore taxi business, gradual improvement in rail profitability and continuing profits from international operations support our bullish case on the stock,” he says in a report issued on Wednesday.  

Adding that the stock should continue to deliver strong free cash flow (FCF) amid an uncertain macroeconomic environment, Jaiswal underscores the research house’s view on ComfortDelgro as a “well-diversified company with an excellent management team that has the ability to generate strong cash flow, deliver steady profit growth, and offer gradual dividend growth”.

As at 11.23am, shares of ComfortDelGro are trading 1.2% higher at $2.56.