Analysts like ComfortDelGro’s undemanding valuation despite lowering their target prices (TPs) on the counter.
RHB Group Research analyst Shekhar Jaiswal has lowered his target price on the transport operator to $1.65 from $1.80 previously as CDG’s extension of the 15% daily rental waiver for Singapore taxi drivers until March 31, while maintaining the commission fee, “puts a damper on [his] earlier expectations of a complete waiver removal” by the end of 2022.
“When it extended the rental waiver to end-2022, the group announced an increase in the commission rate for call bookings to 5% from 4%,” the analyst writes. “This was expected to partially help offset the extension of the rental waiver. However, the latest extension did not come with any changes to commission fees. This has led to a downward revision to our taxi earnings estimates for 2023.”
In addition, CDG is expected to face margin pressures for its public transport business. In the 3QFY2022, the group reported a “sharp decline” in its public transport’s EBIT due to weakness in its overseas public transport operations.
The UK public transport business reported higher operating costs as well as a mismatch in the timing and correlation of contract cost indexation. The group indicated that the timing mismatch could persist in 4QFY2022 as well, says Jaiswal.
“We are taking the opportunity to lower public transport margin for 4QFY2022 and the early part of 2023,” he adds. “In 2021, five of Singapore's bus contracts were extended at lower service fees, which came into effect on Sept 1, 2022.”
See also: Test debug host entity
The analyst also points out that the recent extension of its Sydney bus contract came in with lower margins, while its Bukit Merah and Jurong West bus packages in Singapore have been put up for tender by the Land Transport Authority.
“While our base case is for the group to retain the bus packages, there remains a risk that the margin could come under pressure. Our estimates have yet to reflect this scenario,” says Jaiswal.
Due to these factors, the analyst has lowered his earnings for the FY2022 to FY2024 by 5% to 9%.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
However, Jaiswal has kept his “buy” call on CDG as he believes the group should see elevated demand for its taxi service and higher ridership for its public transport service. This is especially now that China has reopened, which will result in a higher tourist inflow.
Plus, the group’s net cash balance sheet and strong free cash flow (FCF) generation could mean higher dividends, the analyst notes.
At CDG’s current share price levels, the analyst says that the stock is trading at a compelling valuation, with a forward P/E that is well below its 10-year average. “Our TP includes a 12% environmental, social and governance (ESG) premium over the discounted cash flow (DCF)-derived $1.47 fair value.”
Citi Research analyst Kaseedit Choonnawat has also kept “buy” on CDG while lowering his target price to $1.63, down from $1.72 previously.
“We update our CDG model to incorporate cost pressures seen in the 9MFY2022,” says Choonnawat.
He adds that the new target price continues to be based on a P/E ratio of 17x with a rolled-over valuation to 2023.
“We believe a target near-term earnings multiple is the most appropriate valuation method given CDG’s proven historical earnings track record and arguably consistent trading bands,” he writes.
For more stories about where money flows, click here for Capital Section
In his updated model, the analyst has cut his core earnings estimates by FY2022 to FY2024 by 17% on average. However, Citi’s earnings estimates is still at 4% to 11% above that of the street’s.
“We continue to like CDG at the currently undemanding valuation, having seen cost pressure risks arguably priced-in, and its net cash balance sheet,” he says.
“Key downside risks to our bullish view include a structural change in workplace policies toward work-from-home that reduce anchor weekdays’ transport demand, commuters in Singapore, China, and UK acquired and got attached to “super apps” with ride-hailing services such as Grab, GoJek, FREE NOW or Uber that reduce demand on traditional taxis and rental rates,” he adds.
Other key downside risks include volatile electricity and diesel prices which are key components of operating costs, exchange rate risks, given close to a third of pre-Covid operating profits are derived from outside Singapore, unfavourable industry regulations, elevated bond yield that may lead to yield-spread compression and inflationary cost pressure.
As at 2.23pm, shares in CDG are trading flat at $1.18.
