DBS keeps 'buy' for ComfortDelGro but lowers TP to $1.62 amid slower recovery

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

DBS Group Research analysts Andy Sim and Chee Zheng Feng have lowered their target price on ComfortDelGro (CDG) C52 to $1.62 from $1.66 as the transport operator’s results for the 1QFY2023 ended March 31 reflected a slower than expected recovery. CDG’s net profit of $32.8 million for the quarter came in below Sim and Chee’s expectations.

The new target price is 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.

However, the analysts have kept their “buy” call as they say the land transport service company is “moving in the right direction”.

They also note some positives, 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.

Meanwhile, the analysts 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 1.58pm, shares in CDG are trading flat at $1.12.

See Also: