With expectations of higher earnings from stronger overseas public transport earnings and robust Singapore rail ridership numbers and taxi earnings, RHB Bank Singapore analyst Shekhar Jaiswal has kept his “buy” call on ComfortDelGro C52 (CDG) at a raised target price of $1.60 from $1.50 previously.
The analyst’s target price is based on a discounted cash flow (DCF) model and includes an environment, social and governance (ESG) premium of 6%.
In his Jan 12 report, Jaiswal points to the announcement of two developments as reasons for the company’s improved earnings.
A2B acquisition
The first is the 90.75% acquisition of A2B Australia (A2B) at A$1.45 ($1.29) per share, at a total cost of around $150 million, and the second is the company’s taxi booking commission rate rising to 7%.
“The A2B acquisition and higher commission rate should lift FY2024 to FY2025 earnings by 2% to 4% and 4% to 5%,” notes the analyst.
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A2B is listed on the Australian Securities Exchange (ASX) and primarily facilitates taxi bookings, trips and payments. The company has two core revenue streams, the first being fixed monthly fees from taxi operators for facilitating taxi bookings and the second being payment processing fees for non-cash taxi payments.
Notably, A2B has seen a steady improvement in profit with an FY2022 ebitda of A$20 million, although this number is still short of the A$36 million ebitda reported prior to Covid-19.
On a fully-diluted basis, the transaction between CDG and A2B is valued at A$182 million.
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Jaiswal understands that the acquisition will be funded through existing cash and bank facilities.
He continues: “We assume 75% of the value will be funded by debt, and the transaction- which requires multiple approvals- will only be completed by the end of 1HFY2024.”
Singapore taxi commission increase
Meanwhile, effective Jan 1, CDG has increased its commission rate on taxi bookings from 5% to 7%.
The analyst notes: “To help the drivers offset the impact of the higher commission rate, CDG has made the 10% rental waiver permanent as of Jan 1. In addition, from Jan 1 to Mar 31, it has waived commissions for bookings with fares of $9 and lower.”
Despite the rate hike, Jaiswal adds that the company’s commissions are lower compared to its rivals, Grab and Gojek.
He continues: “While TADA and Ryde have opted for a commission-free model for drivers, we don’t think this is sustainable, given their smaller operations. We estimate that every 1% increase in commissions could increase earnings by 2% to 3%. The increase will be partially offset by the permanent extension of 10% rental waiver.”
Estimates
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Overall, Jaiswal remains positive on CDG.
“We increase FY2024 to FY2025 earnings by 3% each. We also maintain our positive outlook for CDG, as we believe it should continue to see growth in 2024,” writes the analyst.
He continues, explaining that the company’s growth will be aided by its overseas public transport earnings, robust Singapore rail ridership and strong taxi earnings amid the increase in fares and commission rates. The introduction of a new fee for bookings on its Zig platform is also a positive catalyst.
Key drivers for CDG noted by Jaiswal include more earnings-accretive acquisitions and the winner of new public transport tenders, a pause in taxi fleet contraction and lastly, more rational competition in the point-to-point transport segment.
Conversely, key risks include higher-than-estimated operating costs and weak taxi earnings from a failure to gradually phase out rental rebates.
As at 3.10 pm, shares in CDG are trading two cents lower or 1.42% down at $1.39 on Jan 12.
