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Analysts have mixed outlook on ComfortDelGro amid high cost environment

Samantha Chiew & Felicia Tan
Samantha Chiew & Felicia Tan2/27/2023 12:39 PM GMT+08  • 7 min read
Analysts have mixed outlook on ComfortDelGro amid high cost environment
Analysts are concerned for ComfortDelGro on the high cost environment. Photo: ComfortDelGro
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Local land transport service company ComfortDelGro (CDG) C52 %

on Feb 24 announced its FY2022 ended Dec 31, 2022, results, which saw earnings improve by 40.7% y-o-y to $173 million, amid a 7.9% higher revenue to $3.78 billion.

The group has declared a final dividend of 1.76 cents per share and a special dividend of 2.46 cents per share. The special dividend was given to commemorate the group's 20th anniversary of its listing on the Singapore Exchange (SGX).

CDG managing director and group CEO Cheng Siak Kan says the company will continue to grow its overseas portfolio by actively participating in bus and rail tenders in countries it already operates in, as well as new geographies. “Significant increases in inflation levels are affecting operations across the group. We are watching these closely and continue to keep a tight lid on costs,” he adds.

With that, analysts have mostly kept a rather optimistic outlook on the group’s growth but have all slashed their target prices as the industry outlook is rather muted.

CGS-CIMB Research has kept its “hold” recommendation with a lower target price of $1.20 from $1.30 previously, as FY2022 core patmi of $137 million came in below analyst Ong Khang Chuen’s expectations at 89% of his forecast and 84% of the consensus forecast, due to lower profit post accounting policy update for bus contracts in Australia and UK bus driver pay deal backpay agreed in December 2022.

“Weaker public transport segment led to another quarter of sequential decline for core ebit to $41 million (-19% q-o-q) in 4QFY2022. Nevertheless, FY2022 dividends surprised on the upside (about 7% yield) as CDG announced final and special dividends that amounted to 4.2 cents per share,” says Ong.

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However, Ong expects the taxi segment to be the bright spot in FY2023, as he is forecasting taxi segment’s ebit to grow 39% y-o-y to $73 million in FY2023. He notes that the driver supply for taxis and ride-hailing remains tight and is unlikely to ease in the near-term due to high Certificate of Entitlement (COE) prices.

“Coupled with the healthy competitive landscape (with private hire platforms focusing on the path to profitability), we believe CDG has an opportunity to further raise monetisation of its app platform, either through a commission rate increase or implementation of platform fees,” says Ong, while noting that CGS charges 5% in commission fee for app bookings, as compared to Gojek’s 15% and Grab’s 20%.

Overall, Ong expects the public transport segment to see margin relief in FY2023, supported by the implementation of rail fare hikes in Singapore and public bus contract’s annual indexation for wages and general CPI (which will allow CDG to pass on the higher costs absorbed over the past year).

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However, there remains uncertainty over the effectiveness and timing of indexation formulas amid the current high-inflation environment. “Management notes that competition for contract tendering remains intense, which we think limits operators’ ability to price in a cost buffer for potential shocks,” says Ong.

Meanwhile, the analysts at DBS Group Research, RHB Group Research, Maybank Securities and OCBC Investment Research (OIR) have a slightly more bullish outlook as they have kept their “buy” calls on the stock. However, like their counterpart at CGS-CIMB, the analysts have also slashed their target prices for CDG.

DBS analyst Andy Sim expects the reopening to help boost the group. “While operations were impacted during Covid-19, we expect its prospects to improve with the reopening, particularly its point-to-point (P2P) operations in Singapore and China,” says Sim, who has dropped his target price on CDG to $1.66 from $1.85.

The analyst expects the recovery in mobility and the adoption of the group’s commission model to help offset input cost pressure. To stem declining taxi rental income, CDG has introduced booking commissions on its re-launched ride-hailing platform app, Zig.

“With full re-opening, we expect revenue growth of 4.3% mostly coming from taxi segments. While we see margin pressure on the public transport segment due to higher electricity cost and labour cost pressure, this should be offset by recovery in taxi and other business segments, higher rail ridership as well as higher service fees on the back of annual indexation of bus service contracts,” says Sim.

Sim is aware that investors remain concerned whether CDG is a dying business given significant fleet attrition. “We see significant upside headroom given the current low commission level of 5% versus 20% for Grab. In addition, with full re-opening, we see profit upside of about $17 million from reversal of rental discounts in China and Singapore, giving us confidence that the odds are in favour of CDG being a value play,” says Sim.

RHB’s Shekhar Jaiswal too has dropped his target price down to $1.40 from $1.60 previously. While overall FY2022 results were in line, Jaiswal is concerned about the group’s margin pressure for its public transport business in 2023, from inflation and lower service fees for bus contracts.

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“We believe the ongoing improvement in Singapore’s rail ridership, bus charter in Australia, and coach services in the UK will continue to support higher earnings for public transport services, despite higher operating costs, the uncertainty over the timing of indexation formulas, and lower bus service fees,” says Jaiswal, who expects this to translate into 11%-14% earnings growth during FY2023-FY2025.

He expects Singapore taxi revenues to improve, and taxi rental rebates to be gradually phased out in 2023. Taxi revenues in China should also improve with the economic reopening.

Some key downside risks include the group losing the Bukit Merah and Jurong West Bus Packages or retaining them at lower-than-estimated service fees, higher-than-estimated operating costs, and weak taxi earnings from a failure to gradually phase out rental rebates.

Overall, the stock is trading at an attractive FY2023 P/E of 13.6x, compared to the 16x forward P/E mean since Jan 2015.

Maybank analyst Eric Ong has lowered his target price to $1.45 from $1.60 previously as CDG's patmi came in below his expectations at 91% of his full-year estimates.

"CDG’s public transport services (PTS) face multiple headwinds such as higher operating expenses (opex) and driver shortages in an inflationary environment," Ong writes. However, he expects to see respite for the PTS segment from margin pressure on relevant wages and energy price indexation in 2023. The implementation of the 2.9% rail fare hike in Singapore that took effect from Dec 26, 2022, may also provide some respite to CDG's PTS segment.

Meanwhile, CDG's Singapore taxi segment could continue to improve as demand for point-to-point trips is likely to remain strong in line with the higher activity levels. CDG's taxi segment in China is also likely to recover following the end of the Covid-19 policy measures and the cessation of rental discounts.

"While the daily rental rebate of 15% for local drivers is maintained until end-March 2023, we see some leeway for its current 5% commission rate for app bookings to be raised as major private ride-hailing companies such as Grab focus more on their profitability," Ong adds.

To this end, the analyst has cut his FY2023-FY2024 earnings per share (EPS) by 9%-10%. His lowered target price is based on a weighted average cost of capital (WACC) of 8.3% and long-term growth (LTG) of 1%.

CDG's total dividend for the full year translates into a yield of 7% based on Ong's estimates.

The research team at OIR have lowered their fair value estimate on CDG to $1.43 after the group's earnings came in lower than their full year expectations.

"Covid-19 has impacted transport activity significantly in Singapore and overseas. As various countries return to normalcy, mobility should also improve in tandem. However, this is not a short process and patience is needed for a more significant recovery," the team writes.

"Meanwhile, inflation is a challenge for the group, weighing on margins. CDG remains in a healthy net cash position and that is also a reason why it has opted to pass on its recent disposal gains to shareholders via a special dividend," it adds.

As at 12.40pm on Feb 27, shares in CDG are trading 2.5% higher at $1.23.

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