CGS-CIMB Research analyst Ong Khang Chuen has lowered his target price on ComfortDelGro (CDG) to $1.56 from $1.75. The new target price is based on a lower FY2023 P/E of 15.9x based on CDG’s five-year historical average, down from the previous 16.8x, he explains.
However, Ong is still positive about the transport operator.
Keeping his “add” call, the analyst sees CDG as a “comfort” pick. Mobility in Singapore has improved rapidly year-to-date (ytd), with CDG’s daily rail ridership returning to 88% of its pre-Covid-19 levels.
The improvement has surpassed Ong’s expectations of an 85% turn by the end of FY2022 ending December.
At the same time, the mismatch in the demand and supply of point-to-point (P2P) transport, which includes both ride-hailing and CDG’s tax arm, has led fares to remain at high levels in the 3Qfy2022 at 30% higher y-o-y despite the easing pump prices.
The improved driver net earnings have also paved the way for CDG to raise its commission rate for app bookings to 5% in October from 4% previously.
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On this, Ong sees further room for CDG to raise its rates as it remains lower than its peers. Gojek currently has a promotional rate of 10% till the end of 2022, while Grab’s rates is currently at 20%.
A defensive pick at 13.6% free cash flow yield
At its current share price levels, CDG is trading at 2 standard deviations (s.d.) below its historical mean (at an FY2023 P/E of 12.9x) with a free cash flow yield of 13.6%.
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“We believe the market has more than priced in the negatives from recent developments [such as CDG’s exclusion from the Straits Times Index, the recent volatility of the Pound Sterling (GBP) and expectations of interest rates staying higher for longer],” Ong writes.
Apart from the Covid-19 pandemic, the counter has outperformed the MSCI Singapore Index over the past five periods of economic weakness over its 18 years of listing history, the analyst adds.
“We attribute this to its defensive business model (public transport operations, vehicle inspection and testing services) and strong balance sheet,” he writes.
Looking ahead, Ong is expecting the group to see a further recovery in its earnings as its key geographies return to a “new normal”.
Forex headwinds
That said, the recent weakness in the Australian dollar (AUD) and the GBP could lead to a negative foreign exchange (forex) translation impact on CDG’s overseas operations.
The negative impact could dampen CDG’s earnings recovery in the 2HFY2022 even if Ong expects the group to see operational improvements in its overseas markets in the 3QFY2022 on the back of improving charter volumes in the UK and Australia as well as lower taxi rental rebates in China.
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“In aggregate, overseas operations contribute 43%/28% of CDG’s revenue/core operating profit in 1HFY2022. Assuming 10%/15% depreciation of AUD/GBP against [the] Singapore dollar (SGD), we see a potential 3.6% hit on CDG’s operating profit,” Ong writes.
The analyst has thus lowered his earnings per share (EPS) estimates for the FY2022 to FY2024 by 2.0% - 7.6% after taking into account forex headwinds and potential near-term margin pressure from rising inflation.
“We still forecast a sequential core net profit improvement in 2HFY2022 to $94 million (+9% h-o-h, +50% y-o-y),” he writes.
“Re-rating catalysts include further adjustments in taxi monetisation and tender win announcements,” he adds. “Downside risks include prolonged strict Covid-restrictions in China.”
As at 3.51pm, shares in CDG are trading 2 cents higher or 1.59% up at $1.28.
