SINGAPORE (Sept 4): DBS Group Research is maintaining its forecasts and “buy” recommendation for ComfortDelGro.
This comes as its taxi fleet contraction bottoms out, giving way to expansion on the back of a milder competitive environment.
Furthermore, the group has been leveraging on its balance sheet to pursue inorganic growth opportunities to supplement growth.
In addition, a fare increase recommendation by the Public Transport Council (PTC) bodes well for rail operators such as SBS Transit, ComfortDelGro’s subsidiary.
“Maintaining positive view on ComfortDelGro with ‘buy’ and $2.59 target price on gradual turnaround in its taxi operations,” says DBS analyst Andy Sim.
Based on LTA statistics, ComfortDelGro’s taxi fleet showed a positive m-o-m increase in July, the first since Dec 2016. While small, Sim says this is a sign that fleet contraction has passed and there is potential for its fleet to increase.
On the other hand, rental cars posted a m-o-m decline to 67,892 cars in July, a contraction of 925 cars from a month earlier.
DBS’ ground checks last week showed a number of private rental cars parked at a carpark in the western part of Singapore, which Sim estimates to be about 400 vehicles owned by Lion City Rentals.
“On the back of this, we believe there is a possibility that the rental car population has peaked, and likely to contract further,” says Sim.
Meanwhile, the PTC has started the annual Fare Review Exercise for 2018.
Public transport operators may submit their applications to the PTC by Oct 1. The council would announce its decision on fare adjustment in 4Q18.
Given previous years’ timeline, the PTC is likely to announce its decision in late Oct/early Nov with the implementation of fare changes to take place in late Dec.
According to the PTC, fares were reduced by a total of 8.3% in the previous three straight years due largely to the dip in energy prices.
In 2017, the fare reduction quantum was 5.4%, with a reduction of 2.2% implemented with the remaining reduction quantum of 3.2% carried over to the next review.
The maximum allowable fare adjustment quantum for this current year’s review is 4.3%.
The fare adjustment will not have an impact on its bus operations given that it is already on the bus contracting model, where the Land Transport Authority (LTA) undertakes the revenue risks.
“We have previously penciled in 2% decline in fares for rail operations. Therefore, assuming a fare increase of 4%, our estimate suggests less than 1% accretion to FY19 earnings, all else constant,” says Sim.
As Sim sees it, the PTC tends to be guarded in its fare increase quantum, placing emphasis of its impact on daily expenses.
“Thus, we believe it could phase out the increase or effect a less-than maximum quantum,” says the analyst.
Year to date, shares in ComfortDelGro are up 13.9% to $2.29.
