Despite a gradual lifting of government support for the public transport and taxi sector, transport operator ComfortDelGro is showing strong domestic earnings recovery, says RHB analyst Shekhar Jaiswal in a Dec 17 note.
For this, Jaiswal is maintaining his “buy” call on the company, with a target price of $1.90.
“ComfortDelGro witnessed a q-o-q improvement in its public transport and taxi businesses during 3QFY2020 despite lower support from the government. While a strong control on Covid-19 should lead to further normalisation of business operations in Singapore early-2021, the availability of a vaccine should support earnings recovery in its overseas markets during 2HFY2021,” he says.
See: ComfortDelGro facing slow recovery after 'catastrophic' 1H20: analysts
“We remain confident of a strong profit recovery in 2021 and believe current valuation remains compelling,” he adds.
Singapore accounted for 58% of revenue and 66% of operating profit for ComfortDelGro in 2019. Jaiswal believes that sequential improvement in the company’s Singapore earnings will continue as the government gradually re-opens the economy.
Its bus operating frequencies should gradually revert to pre-Covid-19 levels and ridership for its rail business should continue to witness sequential improvement over the next few quarters, he adds.
The recent exit of HDT Singapore Taxi, the smallest taxi operator, and a potential merger between Grab and Gojek should lead to lower competitive intensity in Singapore’s taxi business, says Jaiswal, which will be positive for ComfortDelGro’s taxi business.
In addition to Singapore, ComfortDelGro also operates bus and coach services in Australia, the United Kingdom, China, Ireland, Vietnam and Malaysia.
Jaiswal points towards the upcoming UK lockdowns as a cause for concerns. “While we see near-term earnings headwinds from the recently announced lockdown in the UK, we believe that the situation should start improving by mid-next year.”
“Significant improvement in its UK and Australian public transport and taxi businesses should be visible once the Covid-19 vaccine becomes available during 2HFY2021,” he says. In 2019, the UK and Australia accounted for 10% and 19% of CD’s operating profit.
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Aside, Jaiswal expects strong earnings growth in 2021. “We maintain that gradual normalisation of business activities in Singapore and ComfortDelGro’s key overseas markets (the UK and Australia) should translate into higher earnings for its public transport and taxi businesses in 2021.”
While full recovery to pre-Covid-19 earnings could take more than two years, we expect ComfortDelGro to deliver a strong rebound in earnings next year, he says.
Jaiswal is assessing the company’s valuation on the back of strong earnings growth expected in 2021. “ComfortDelGro is trading at 1.4x 2021F price to book value (P/BV), which is slightly above its historic low of 1.2x. We believe its P/BV multiple has yet to capture the expected improvement in return on equity (ROE).”
As at 11.09am, shares in ComfortDelGro are trading flat at $1.72.