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Longer taxi lifespan, lush dividend and further recovery ahead

Felicia Tan
Felicia Tan • 5 min read
Longer taxi lifespan, lush dividend and further recovery ahead
ComfortDelGro's CEO Cheng Siak Kian speaking at the recent FY2023 results briefing. Photo: ComfortDelGro
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Local taxi operators are set to benefit from a series of proposed changes to how they operate. The government, as part of its bid to help address the post-pandemic shortage, announced on March 5 plans to allow taxis to be used for up to 10 years instead of implementing the eight-year lifespan cap. Operators are supposed to pass on net savings to the drivers in the form of lower rental but the net effect is likely to be positive for operators too.

“While the timeline for implementation has not been finalised, we view them as positive for the taxi industry and especially for ComfortDelGro C52 -

, says RHB Bank Singapore’s Shekhar Jaiswal, who has kept his “buy” call and raised his target price from $1.60 to $1.65.

Next, taxis are not required to undergo roadworthiness inspection as frequently. For ComfortDelGro which maintains an adjacent business of vehicle inspection, this move might reduce intersegment revenue but Jaiswal believes this will still help translate to lower taxi operating costs.

DBS points out that with operating lifespan extended to 10 years, taxi operators are likely to pay a higher certificate of entitlement. “We do not see an issue for Comfort taxis given its strong balance sheet,” says DBS, which has also kept its “buy” call and $1.67 target price.

The net effect of the changes could lead to a brighter outlook for the taxi industry and the taxi fleet might even start expanding again, says DBS. From a peak of more than 28,000 vehicles in 2013 and 2014, the taxi fleet has more than halved to 13,483 as of January 2024.

The cheers from the analysts over the proposed policy changes came just less than a week after the company reported better FY2023 ended Dec 31, 2023, numbers that led to several upgrades in target prices.

See also: HSBC CFO Georges Elhedery appointed as new group CEO

In FY2023, ComfortDelGro reported a patmi of $180.5 million, up 4.3% y-o-y. Excluding the one-off gain in FY2022 from the sale of ComfortDelGro’s Alperton property in London, earnings grew 26.6% y-o-y, with improvement seen across all segments due to better operating margins. On a sequential basis, ComfortDelGro’s earnings grew 29.9% h-o-h to $102 million in 2HFY2023.

In FY2023, ComfortDelGro saw positive updates with renewals and adjustments in the UK at better terms to consider higher costs due to inflation. Its bus businesses in Singapore and Australia also saw stabilisation after re-contracts in 2022. Furthermore, rail ridership here was up significantly y-o-y, says Christopher White, group finance business partner and treasurer.

ComfortDelGro’s taxi and private hire business in Singapore and overseas grew the topline by 3.6% y-o-y to $574.7 million. However, earnings surged 59.5% y-o-y to $106.7 million as post-pandemic demand grew even with higher fares and commission fees. However, the post-Covid recovery in China was not as good as expected.

See also: Temasek reports 1.83% y-o-y increase in NPV; stresses long-term returns

Given further recovery prospects, analysts have stayed positive on the counter. “With improving fundamentals, a lush 6.0% dividend yield and a robust balance sheet, we reckon that most negatives have already been priced in,” said UOB Kay Hian’s Llelleythan Tan Yi Rong and Heidi Mo in their March 4 report.

“We opine that there is still much potential upside at current price levels,” add Tan and Mo who have a “buy” call and $1.57 target price.

CGS International analyst Ong Khang Chuen is projecting ComfortDelGro’s bottom line to grow 15% in the current FY2024, thanks to further margin expansion in its UK business and higher fees collected for its taxi-booking platform Zig in Singapore. Ong’s unchanged target price of $1.60 is based on 16.2 times FY2025 P/E or 0.5 standard deviations (s.d.) above its five-year historical average.

DBS Group Research, in its Feb 29 note likes ComfortDelGro for “shaking off its dying taxi business stigma” and transforming it into a growing ride-hailing model. “With resilient ride-hailing demand in Singapore and 2% higher booking commission (as of January), we see further growth headroom and margin uplift this year,” says DBS.

The worst also seems to be behind ComfortDelGro’s public transport business with the return of profitability of its UK business. In Singapore, ComfortDelGro’s public transport segment is expected to see improved margins with higher ridership (the group’s ridership in January stood at 100.4% of its pre-Covid levels) and its 7% fare hike.

DBS warns that with the string of acquisitions, ComfortDelGro’s debt level may reach more than $280 million this year. “Nonetheless, we believe the company’s balance sheet remains strong given its net cash position of $500 million (as of end 2023),” says DBS.

For Paul Chew of PhillipCapital, FY2023 earnings came in at 117% of his forecast, thanks to turnaround in the UK bus and China taxi operations. Even with the earnings beat, Chew expects the company to report further growth.

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In his March 4 note, using a discounted cash flow method, Chew raised his target price to $1.63 from $1.57 while keeping his “buy” call. He says the company is set to enjoy higher platform and commission fees for its Singapore taxi business. Next, with re-contracts of its UK bus operating agreements at higher prices, the company can better manage the recent costs spike. Chew also expects a bigger taxi fleet in China and its Singapore rail operations to see operating costs stabilising, higher passenger numbers and higher fares.

Jaiswal of RHB Bank Singapore has also raised his target price from $1.60 to $1.65 on “strong profit growth” in FY2024. Along with operational improvements, he has factored in a higher dividend payout ratio of 75% from 70% now. “New contract wins and accretive acquisitions would be re-rating catalysts.”

 

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