SINGAPORE (Nov 20): KGI Securities is upgrading ComfortDelGro Corporation to “outperform” after recent share price weakness that has seen the counter plunge from its recent peak in July.
The counter closed at $2.36 on Nov 19, some 17% lower than its closing price of $2.84 on July 9.
“Risk-to-reward dynamics have now become favourable,” says analyst Joel Ng in a Nov 19 report. “We now believe it’s time to grab a piece of this steady cash flow business.”
Despite the upgrade, it is still expected to be a bumpy ride for ComfortDelGro going forward.
The public transport operator missed estimates as it saw its earnings slide 10.8% lower to $70.0 million in 3QFY2019 ended September, even as revenue edged up slightly by 1.1% to $979.0 million.
The earnings decline was driven by higher staff, depreciation, and repair and maintenance costs, which contributed to a 1.8% rise in operating costs to $870.1 million during the quarter.
Operating profit retreated 4.0% to $108.9 million, on the back of higher losses in the rail business and keen competition in the taxi business.
See: ComfortDelGro posts 10.8% drop in 3Q earnings to $70 mil
Ng is cutting his earnings forecasts for FY2019F to FY2021F by between 6% and 7%. As a result, he is lowering his target price for ComfortDelGro to $2.61, from $2.77 previously.
For now, Ng believes that the group’s key downside risks – including a depreciating Australian dollar and uncertainty in the UK – have already been priced into the current share price.
Going forward, the analyst says the 7% hike in public transport fare, which is scheduled to kick in on Dec 28, will help to ease some of the cost pressure on ComfortDelGro, as well as lead to an improvement in its rail operations.
Meanwhile, he notes that the group’s balance sheet “remains in a strong position to take on more EPS-accretive acquisitions”. As at end-September, the group’s cash and cash equivalents stood at $518.5 million.
“We like ComfortDelGro’s healthy cash flow business and aggressive use of its strong balance sheet to expand via acquisitions,” Ng says. He adds that the counter offers a “sustainable” FY19-21F dividend yield of 4.6%.
As at 1pm on Wednesday, shares in ComfortDelGro are trading 2 cents lower, or down 0.8%, at $2.34. According to KGI valuations, this implies an estimated price-to-earnings (P/E) ratio of 17.7 times and a price-to-book value (P/BV) of 1.9 times for FY2019F.
