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Exclusion from STI is 'much-needed relief' for ComfortDelGro, says RHB

Felicia Tan
Felicia Tan9/8/2022 02:08 PM GMT+08  • 3 min read
Exclusion from STI is 'much-needed relief' for ComfortDelGro, says RHB
At its current share price, CDG’s valuations are looking “a lot more compelling”, in Jaiswal’s view. Photo: ComfortDelGro
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ComfortDelGro’s (CDG) exclusion from the Straits Times Index (STI) is a “much-needed relief”, says RHB Group Research analyst Shekhar Jaiswal.

“A technical overhang on [CDG’s] share price is now cleared,” he adds.

CDG was displaced by Mainboard-listed brandy maker Emperador after the FTSE Russell’s quarterly review on Sept 1. Emperador will take its place in the 20th position within the benchmark STI on Sept 19.

In his report, analyst Jaiswal is keeping his “buy” recommendation with an unchanged target price of $1.75.

To him, the removal of CDG will allow investors to now focus on the stock’s fundamental earnings outlook, which he believes, remains strong amid the removal of most Covid-19 related curbs in Singapore.

“While we expect CDG to report a sequential improvement in earnings, investors could be waiting to assess: the impact of the amended lower service fee from September onwards; and whether CDG extends the taxi rental rebates beyond end-September,” he writes.

See also: 'Buy' ComfortDelGro on share price weakness: analysts

The analyst sees the extension of taxi rebates beyond the initial period as one of the key downside risks to CDG’s share price. Other downside risks include the lower public transport earnings from reduced bus revenue in Singapore amid amended contracts, as well as the continued decline in its taxi fleet size. The sharp decline of economic growth in the UK is also another downside risk.

On the group’s taxi rental rebate, CDG, which has seen a consistent decline in its taxi fleet size and a sharp rise in demand, now has the opportunity to reduce or do away with the 15% rental rebates that it is currently offering its drivers till the end of September.

The analyst notes that the $5 daily rental rebate offered by the Singapore government to taxi drivers as part of the $1.5 billion support package has already ended in August.

See also: Broker's Digest: Thai Beverage, China Sunsine, Far East Hospitality Trust

On the group’s rail and bus services segment, Jaiswal expects CDG to see an improvement in its rail ridership in Singapore in the coming months.

“We believe the y-o-y higher rail ridership and transition of the Downtown Line to the New Rail Financing Framework 2 should translate into the y-o-y higher rail earnings,” he writes.

“Nevertheless, investors could still be waiting to assess the impact of lower bus service revenue, which took effect this month, on CDG’s public transport earnings,” he adds. “Our view is that the improvement in the rail business should help offset some reduction in its bus service fees.”

At its current share price, CDG’s valuations are looking “a lot more compelling”, in Jaiswal’s view.

The counter’s share price has fallen by 7% since mid-August and is now trading at an FY2023 P/E of 13.9x, lower than its 10-year average forward P/E of 16x.

“Our discounted cash flow (DCF)-derived $1.75 target price implies 17.7x FY2023 P/E, which – although higher than its historical average – seems reasonable, amidst the earnings recovery. Our target price includes a 12% environmental, social and governance (ESG) premium over the $1.56 fair value,” says Jaiswal.

As at 2.07pm, shares in ComfortDelGro are trading 1 cent higher or 0.73% up at $1.38.

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