SINGAPORE (June 18): RHB Research has upgraded ComfortDelGro (CD) to ‘neutral’ as the stock looks fairly priced now although it remains confident over the company’s growth recovery.

“While we like the defensive nature of its earnings, investors should consider buying at a lower price (about $2.40),” says analyst Shekhar Jaiswal in a Tuesday report, adding that the stock is trading at 17.3 times 2019 earnings versus its five-year average of 15 times.

In a Tuesday report, analyst Shekhar Jaiswal says CD’s public transport unit remains the key earning driver, aided by organic growth in Singapore and contributions from acquisitions undertaken in 2018.

Based on the company’s latest quarterly results, public transport business accounts for 70% of revenue and 50% of EBIT.

In addition to organic growth from its bus operations in Singapore, the reduction of losses for its rail business, which has witnessed higher ridership and higher average fares, should also support earnings growth for its public transport business in Singapore.

In 2018, CD undertook $479 million worth of acquisitions. These new acquisitions, which have been earnings-accretive, offer EBIT margins that are higher than that of its existing businesses.

According to Jaiswal, at a net gearing of 30% which is a level that management is comfortable with, CD would have access to $800 million of funding to support further acquisitions of earnings-accretive businesses.

However, the major downside risk to CD is the continual contraction of its taxi fleet, says Jaiswal.

During its recent quarterly announcements, CD had lowered its revenue guidance for the taxi business to “decrease” from “maintain”, amid weak operations in China and expectations of growing competition from ride-hailing players in Singapore.

While its taxi fleet idle rates have increased, management expects higher rentals from the replacement of older taxis with new hybrid cars to offset some of the revenue decline.

“We believe that the continuing decline in taxi fleet size, as evident from latest industry statistics, could pose as a downside risk to CD’s taxi earnings, which account for 30% of its EBIT,” says Jaiswal.

Year to date, CD has outperformed the benchmark STI by about 20% and valuations now look stretched.

“We highlight that our FY20-21 profit estimates are 5-8% ahead of the Street’s. Barring downside revisions to earnings, we note that its 4% dividend yield – which we believe is sustainable – should provide downside protection to its share price,” he adds.

As at 10.55am, shares in ComfortDelGro are trading at $2.58, implying a FY19F core EPS of 15 cents and at 2.2 times book value.