SINGAPORE (Nov 17): UOB Kay Hian, DBS Group, OCBC and RHB are all calling a “buy” on ComfortDelGro with target prices of $2.90, $3.09, $3.08 and $3.19 respectively.

UOB says it continues to like the transport operator for its defensive qualities and diversified earnings stream. It also expects a dividend payout as Singapore’s bus and rail segments transit to an asset-light model.

Notably, lead analyst Andrew Chow says rail revenue increased 26.1% y-o-y in 9M16 on the back of strong ridership momentum growth from both the North-East Line (NEL) and the Downtown Line (DTL). Average daily ridership for the DTL almost doubled to 234,000, while the NEL saw a 5.3% y-o-y increase to 566,000.

ComfortDelGro has also managed its cost well. 9M16 operating cost declined 0.8% on year, supported by lower fuel and electricity costs which helped offset higher repair and maintenance costs. And despite threats from private hire-car operators, revenue from the group’s taxi operations rose 2.2% in 9M16.

Meanwhile, DBS sees growth despite foreign currency translation headwinds. “While 3Q16 recorded only 2.5% net profit growth, 9M16 earnings increased 5.2% y-o-y to $246 million. We expect 4Q16 to register stronger growth on the back of the weakening SGD against AUD and GBP in recent days,” says analyst Andy Sim.

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ComfortDelGro’s recent share price correction puts valuations at below five-year average of 16.6x/15.3x FY16F/17F PE. It also believes there is a potential for higher dividend payout which comes with lower capex requirements.

The group’s EBIT margins improved by 22bps to 12.5% in 3Q16 (3Q15: 12.3%) arising largely from lower energy and fuel costs (-24% y-o-y), and materials and consumables (-27%).

OCBC says the stock is supported by a “decent” 3.8% forward dividend yield and with improved free cash flow outlook under new bus model, does not rule out potentially higher dividend payout ratio in the future.

Lead analyst Eugene Chua says even as ComfortDelGro’s 9M16 revenue fell 0.5% y-o-y to $3.0 billion, PATMI rose 5.2% to $245.9 million mainly due to decline in operating expenses driven by lower energy costs and lower materials and consumables costs, and met 75.1% of OCBC’s FY16 forecasts.

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Chua says management has also noted they are making progress with respect to M&A activities, with discussions still on-going with its target.

RHB agrees that the recent fall in its share price is overdone. Analyst Shekhar Jaiswal continues to like ComfortDelGro’s well-diversified business and expects bus margins and rail revenues to improve.

“We expect ComfortDelGro’s Singapore bus business to book 7-8% EBIT margins from 4Q16 under the government contracting model (GCM), which should support growth into 2017. Its rail unit should see revenues increase amidst higher ridership once the Downtown Line Stage 3 (DTL3) is operational in Sep 2017, despite the recently announced 4.2% fare reduction,” says Shekhar.

“We view 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,” adds the analyst.

Shares of ComfortDelGro are down 3 cents at $2.41.

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