Analysts keep 'buy' for ComfortDelGro but lower TP amid slower recovery

Analysts say CDG’s 1QFY2023’s net profit was below their expectations, but are showing q-o-q improvements.

As ComfortDelGro’s (CDG) C52 net profit for the first quarter came in below expectations, analysts from DBS Group Research and RHB Group Research have lowered their target price to $1.62 and $1.25 respectively from the previous targets of $1.66 and $1.40. The transport operator’s results for 1QFY2023 ended in March 31 was $32.8 million.

DBS analysts Andy Sim and Chee Zheng Feng have set their target price based on a blended valuation of -0.5 standard deviation (s.d.) of CDG’s five-year historical P/B and ev/ebitda at 1.2x and 5x respectively.

“Our upside hinges on roughly 40%-60% contribution from re-rating towards its five-year historical average and earnings recovery on easing restrictions and mobility improvement respectively,” the analysts write.

In addition to their lowered target price, Sim and Chee have also trimmed their earnings estimates for the FY2023/FY2024 by 6.5% and 7.9% respectively on lower revenues from their Australian, Chinese taxi and bus segments.

Similarly, RHB’s analyst Shekhar Jaiswal has trimmed his earning estimates for the FY2023 to FY2025 by 10% to 12%.

Nonetheless, the analysts from both brokerages have kept their “buy” call.

Sim and Chee from DBS say that CDG is “moving in the right direction”, as CDG earnings are “showing improvements on a q-o-q basis”, with patmi improving by 28.6% q-o-q from 4QFY2022.

“This was on the back of improvement in its public transport contribution, partially offset by seasonality in its taxi business,” they say.

CDG is one of the largest land transport operators globally with leading operations in Singapore, Australia and the UK. While the analysts say that operations were impacted during Covid-19, they expect its prospects to improve with reopening, particularly its point-to-point operations in Singapore and China.

CDG has also embarked on multiple initiatives to turn its business segments green, such as provision of electric vehicle charging and greening its buses and taxi fleet, which could potentially pave the way for inclusion in environmental, social and governance indices.

The analysts note that CDG has introduced booking commissions since May 2022 on its re-launched ride-hailing platform app, Zig. With full-reopening, they expect revenue growth of 4.5% mostly coming from taxi segments, despite higher margin pressure on the public transport segment due to higher electricity cost and labour cost pressures.

“This should be offset by recovery in taxi and other business segments, higher rail ridership as well as higher service fees on back of annual indexation of bus service contracts,” say Sim and Chee.

Likewise, Jaiswal from RHB highlights CDG’s “strong balance sheet, reasonable dividend yield and compelling valuation”.

“CDG generated $89.6 million of free cash flow (FCF) in 1QFY2023, which has taken its cash balance to $1.01 billion. It is in a net cash position of $715 million and has access to $775 million worth of banking facilities,” says Jaiswal. “Even with our estimate of its capex reaching pre-pandemic levels by 2025, we expect it to continue building on its current strong net cash position.”

The analyst says that this strong FCF generation should enable CDG to pay higher dividends in 2023 to 2025, estimating a 65% payout ratio during this period which implies yields of 4.5% to 5.5%. CDG’s forward P/E valuation is at -1 s.d. compared to its historical average since January 2015.

However, Jaiswal also highlights several key downside risks, which includes CDG losing its Bukit Merah and Jurong West bus packages, or retaining them at lower-than-estimated service fees. He notes that CDG has higher-than-estimated operating costs, and weaker taxi earnings from failing to gradually phase out rental rebates.

Meanwhile, Sim and Chee from DBS highlight that investors may remain concerned about the sustainability of CDG’s taxi business due to significant fleet attrition, noting that share prices “are still flirting at its 15-year low”.

“Understandably, this may have worn many investors out especially with its underwhelming 4QFY2022 results. However, with the latest set of 1QFY2023 business updates, we see some light at the end of the tunnel with sequential improvement.” they say.

This is supported by China’s reopening, lower taxi rental rebates in Singapore, indexation for CDG’s public transportation operations and ceding inflation, all of which bode well for CDG, say the analysts.

As at 4.58pm, shares in CDG are trading 2 cents lower or 1.77% down at $1.11.

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