Analysts from CGS-CIMB Research and RHB Group Research have maintained their “buy” calls on ComfortDelGro after the transport operator announced that its joint venture (JV) secured a $1.13 billion contract to operate rail services in Auckland, New Zealand.
See: ComfortDelGro JV wins $1.13 bil rail services contract in New Zealand
While CGS-CIMB’s target price remains unchanged at $1.80, RHB has upped its target price to $2.03 from $2 previously.
The new target price from RHB implies 18 times FY2022 price-to-earnings (P/E), and 1 standard deviation (s.d.) above its 10-year average.
To RHB analyst Shekhar Jaiswal, the contribution from Auckland is a small one but it is a maiden business in a new market.
“The service contract is based on a gross cost model, where the revenue risk sits with the transport authority. The JV will not have to bear any infrastructure-related costs, although in addition to assuming the responsibility for passenger train operations, it will be responsible for the maintenance of the rolling stock from 2025,” he notes in an Aug 30 report.
“Given the low risk model, we assess that the business will generate low single digit EBIT margins.”
To this end, Jaiswal expects to see ComfortDelGro benefitting from the reopening of Singapore’s economy, with improvement in the group’s operating metrics for its public transport and taxi businesses.
“If successful, we believe there is scope for extending current plans of opening Singapore’s international travel from selected countries to more nations. Higher inflow of international travellers is expected in 2022, which will be positive for Singapore’s land transport sector, especially the train and taxi businesses, which are ComfortDelGro’s mainstay in Singapore,” he says.
In addition, Jaiswal estimates that the group’s overseas businesses in the UK and Australia will see visible recovery in its earnings for the 2HFY2021 ending December.
The UK has relaxed its restrictions while earnings from Australia have already reverted to pre-Covid-19 levels.
“While the timing remains uncertain, favourable changes to the Downtown Line’s financing framework could bring about a material upside risk to earnings. IPO of its business in Australia could also be a re-rating catalyst,” observes Jaiswal.
To him, his new target price seems “reasonable” in view of the expected earnings recovery and re-rating catalysts.
CGS-CIMB analysts Ong Khang Chuen and Darren Ong view that the worst is now over for ComfortDelGro with the reopening of the economy in Singapore.
Their unchanged target price is based on 16.8 times 2022 P/E, or 0.5 s.d. above the group’s five-year historical average.
Like Jaiswal, the analysts from CGS-CIMB view the tender win as positive albeit with limited accretion for its earnings per share (EPS).
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Nevertheless, the win marks ComfortDelGro’s “successful entrance” into another country.
“A good working relationship with UGL Rail could also open up possibility for further collaborations,” say the CGS-CIMB analysts.
“Assuming the contract revenue is recognized equally over the service period, and the contract runs at operating profit margin (OPM) of between 5%-8%, we estimate ComfortDelGro’s profit share from the JV could amount to $2.5 million to $4.1 million annually. This implies some 1.1%-1.8% EPS accretion for FY2022,” they add.
Shares in ComfortDelGro closed 1 cent higher or 0.61% up at $1.64, with an FY2021 P/B of 1.3 times and a dividend yield of 2.7%, according to RHB’s estimates.
Photo: ComfortDelGro
