SINGAPORE (Nov 13): The road ahead seems long and arduous for transport operator ComfortDelGro.
While revenue from its bus businesses in Singapore, Australia and the UK are expected to grow, its taxi business is stuck in a jam amid rising competition from private hire car service providers Grab and Uber.
To make matter worse, analysts now say breakeven for CDG’s Downtown Line 3, which opened in October, is expected to be pushed back from 2018 to 2019 due to an upcoming 5.7% fare reduction.
CDG saw its earnings fall 8.2% to $80.1 million in the 3Q ended September on the back of a 2.4% decline in revenue. This was led by an 11.2% drop in revenue from its taxi business to $298.3 million.
See: ComfortDelGro reports 8.2% fall in 3Q earnings to $80.1 mil
“In the near term, weakness in its taxi business would likely outweigh the growth registered by its bus business,” says RHB Research analyst Shekhar Jaiswal in a Monday report.
RHB is downgrading CDG to “neutral”, from “buy” previously, and lowering its target price by 60 cents to $2.00.
“Looking ahead, CDG expects revenue for taxi business to decrease, with automotive engineering services segment to decline as well on lower taxi fleet and lower diesel volume sold to taxi drivers,” says OCBC Investment Research lead analyst Eugene Chua in a Monday report.
“In our view, given Grab’s aggressive expansion, we believe CDG’s taxi margins will fall in order to stay competitive to keep its idle rate low,” he adds.
OCBC is keeping its “hold” call on CDG, with a lower fair value estimate of $2.05, down from $2.12 previously.
Over at DBS group Research, analyst Andy Sim acknowledges that challenges persist for CDG. However, he points out that CDG’s current yield of more than 5% could provide support for its share price.
“While headwinds persist for its taxi business, this should be partially mitigated by improvements in its public transport business,” Sim says. “We expect DPS to be at least maintained, if not nudged up, given its lower capex requirements.”
DBS is keeping its “hold” call on CDG, with a lower fair value estimate of $2.18, down from $2.33 previously.
However, the analyst adds that he is awaiting the outcome of CDG’s strategic alliance with Uber.
“A stabilisation of taxi fleet contraction, or positive fruition of its strategic alliance with Uber and perceived benefits could be catalysts for the stock,” he says.
Maybank Kim Eng Research analyst John Cheong is upbeat on CDG’s Uber tie-up, which he believes could be “finalised soon”.
“Uber tie-up could be finalised before end-November 2017,” Cheong says. He adds that benefits for CDG include offsetting its taxi business weakness, partnering with a player with deeper pockets who could share complementary strategies, and tapping on Uber’s better technology.
In this light, Maybank is keeping its “buy” recommendation on CDG with an unchanged target price of $2.40.
“Concerns over the contraction in the Singapore taxi business are valid, but we think the sell down of the stock has been over-done. The Singapore taxi business remains profitable,” says Phillip Securities Research analyst Richard Leow in a Monday report.
“While group profit is lower, free cash flow has actually improved owing to lower taxi capex,” he adds.
Phillip is maintaining its “buy” call on CDG with a lower target price of $2.69, down from $2.78 previously.
“We see PATMI bottoming this year,” Leow says, adding that he believes the FY16 dividend of 10.3 cents can be maintained this year.
As at 4pm, shares of ComfortDelGro are trading 4.5% higher, or up 9 cents, at $2.09. According to Phillip, this implies an estimated price-to-earnings ratio of 13.6 times and a dividend yield of 5.4% in FY17.
