DBS Group Research is still keeping its “buy” call on ComfortDelGro (CDG) even if faces the risk of removal from the benchmark Straits Times Index (STI) with the inclusion of Yangzijiang Financial Holdings (YZJFH) into the index.
The brokerage is also keeping its target price of $1.95 on CDG unchanged.
When it starts trading on April 28, YZJFH will be added to the STI with the same investable weight as its parent company, Yangzijiang Shipbuilding (Holdings).
The smallest constituent in the STI will then be removed from the index effective May 5.
As at April 20, CDG is the smallest constituent in the STI with a market capitalisation of $3.27 million and an STI weight of 0.6%.
“In essence, unless YZJFH or Yangzijiang Shipbuilding trades below CDG’s market cap on April 28, CDG will be subject to removal from the STI from May 5,” the DBS team points out in their April 20 report.
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Following the likely removal of CDG, the analysts are expecting some “near-term pressure” on CDG’s share price as the exchange traded funds (ETFs) rebalance, although the group’s liquidity seems ample enough to absorb the impact, the team adds.
The total holdings of CDG from the two main STI ETFs, SPDR STI ETF and NikkoAM STI ETF currently stands at $33 million.
The team at OCBC Investment Research has also kept “buy” on CDG with a slightly higher fair value estimate of $1.75 from $1.70 previously.
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The higher fair value estimate is thanks to an improvement in CDG’s ESG score from April 2017 to August 2021.
“The group scores well on governance, but is below industry average for labour management, carbon emissions and health and safety. The company’s ESG performance appears better than its industry peers, notably supported by its strong governance structures,” says the team.
The OCBC team’s report was published on April 18, before the news of YZJFH’s inclusion into the STI and other indices on April 20.
In their report, the team notes that CDG is “on the road to recovery”, with its shares delivering a total return of 7.9% year-to-date (y-t-d), compared to the STI's 7.5%.
In addition, the team notes that there has been improving mobility data in CDG’s three key geographies, Singapore, the UK and Australia, on the back of easing Covid-19 restrictions.
“We expect further recovery ahead, with the Singapore government taking a decisive step towards re-opening. Border restrictions have largely been lifted, as vaccinated travellers into Singapore are no longer required to take vaccinated travel lane (VTL) flights or undergo an ART test within 24 hours of arrival,” the team writes.
CDG’s average rail ridership in March also stood at 70% of its pre-Covid-19 figures, higher than the 66% level in February.
However, with the considerable increase in fuel prices, CDG is absorbing a large part of the increase after imposing a token 1 cent increase in taxi fares from April 4. Coupled with the time taken for rent rebates to decrease for drivers, the OCBC team sees potential pressure on CDG’s margins in the meantime.
Shares in ComfortDelGro closed flat at $1.51 on April 21.
