SINGAPORE (Sept 19): ComfortDelGro Corporation (CDG) could see headwinds ahead for its public transport business, despite a fare hike of up to 7% that is expected to be announced later this year.
According to RHB Group Research analyst Shekhar Jaiswal, this is because any positive impact for the fare increase is likely to be at least partially negated by higher operating costs.
“[ComfortDelGro] expects cost pressures in the coming quarters due to higher maintenance costs related to mid-life refurbishments to be undertaken at the North-East Line,” Jaiswal says in a Thursday report.
The analyst is maintaining his “neutral” call on CDG with an unchanged target price of $2.55.
Singapore’s Public Transport Council (PTC) earlier this month announced that public transport fares could increase by as much as 7% in the fare review exercise for 2019, on the back of double-digit increase in energy prices.
This follows a fare hike of 4.3% implemented in December last year.
See: Public transport operators unlikely to benefit much despite up to 7% fare hike this year
So far, growth for CDG’s public transport business has been driven by new bus contracts in Singapore – the Seletar and Bukit Merah packages – as well as on the back of acquisitions and lower losses from its rail business amid the increase in fares last year.
Meanwhile, the taxi business, which accounted for 35% of operating profit in 2018, is expected to continue to remain a drag on CDG in the near-term.
CDG’s taxi fleet has declined by 9.4% during the first seven months of 2019 to 11,200, according to data from the Land Transport Authority.
The transport operator is also coping with the loss of drivers to ride-hailing players, which has increased the idle rate for the Singapore taxi fleet to 2.5%, Jaiswal notes.
“Management guided that the replacement of older Hyundai Sonata taxis with hybrid cars, which has helped in offsetting some weakness from declining fleet size, is also being delayed due to a supply shortage,” he says.
Jaiwal posits that CDG could offer higher incentives to retain drivers at the cost of profit margins in its taxi business. However, the company expects to shrink its taxi fleet by the end of the year.
On the plus side, Jaiswal notes that CDG’s acquisitions in 2018 have been earnings accretive, with higher margins than its existing business.
“[CDG] should have access to close to $800 million of funding to support further acquisitions of earnings-accretive businesses. Further upside could also come from the turnaround of its rail business, especially the Downtown Line, which has lost close to $125 million in last three years,” he adds.
As at 2.45pm on Thursday, shares in CDG are trading 2 cents higher at $2.47, implying an estimated price-to-earnings (PE) ratio of 18.7 times and a dividend yield of 3.8% for FY19F.
