UOB Kay Hian analyst Llelleythan Tan has kept his “buy” call on ComfortDelGro (CDG) as he sees the group’s rail ridership recovery as being on track.
In August, CDG’s rail ridership improved by 55.8% y-o-y and 5.0% m-o-m, accounting for 86.2% of its pre-pandemic levels as at August 2019.
“This is in line with expectations as we expect continued ridership growth given that most Covid-19 measures have been eased. This is also an improvement from July [this year] when rail ridership only formed 79.9% of pre-pandemic levels,” says Tan.
“With record-high taxi and ride-hailing surcharges, we also expect more commuters to shift to trains. We maintain our view that rail ridership will return to near pre-pandemic levels by 1QFY2023,” he adds.
Meanwhile, CDG is expected to see lower bus service revenue with the Downtown Line (DTL) transitioning to the new rail financing framework version 2 (NRFF V2) as at January this year.
“Under NRFF V2, profits from the DTL would be capped at 5.0% ebit margin, with the Land Transport Authority (LTA) sharing 85% of the spoils if exceeded, while 50% of any losses below 3.5% ebit margin would be co-shared, limited to the annual licence charge,” Tan writes.
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“As DTL has been operating at a loss, this has resulted in annual cost savings of around $20 million, based on our estimates,” he adds.
SBS Transit has also extended five existing bus contracts by three years at a lower service rate, losing around $34 million operating profit per year starting Sept 1.
To this end, the analyst has incorporated the lower service revenue into his estimates and reckon that the strong recovery in rail ridership and savings from the transition to NRFF V2 would help mitigate some of this loss.
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The possible removal of CDG’s taxi rental rebate may see CDG’s drivers go to other ride-hailing operators such as Grab and Gojek instead, considering CDG’s daily rentals are almost double compared to its competitors.
As such, while CDG has yet to decide if it will extend its 15% discount on taxi rentals from end-September, Tan believes that the group will reduce its taxi rental rebates rather than remove them entirely, keeping its daily rental rates competitive for taxi drivers.
Noting CDG’s exclusion from the Straits Times Index (STI), Tan says the move was within his expectations as the group had been consistently ranked last among the benchmark index’s constituents by market cap.
CDG was also in 49th place among all the eligible securities on the Singapore Exchange (SGX), Tan notes.
“Although we expect short-term downward pressure on CDG’s share price performance, CDG’s fundamentals remain intact with the strong recovery in both rail ridership and taxi passenger demand poised to continue,” says Tan.
“With the removal of this overhang, we opine that CDG’s expected earnings recovery would help underpin better share price performance moving forward,” he adds, seeing “some upside” at CDG’s current price levels.
In his report, Tan has lowered his target price to $1.63 from $1.73 previously.
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The new target price is based on a new sum-of-the-parts (SOTP) valuation from its previous P/E-based valuation.
“Our new target price implies 16x FY2022 P/E, similar to its five-year average mean P/E,” says Tan.
Shares in CDG closed flat at $1.40 on Sept 20. Its share price implies an FY2022 P/B of 1.1x and a dividend yield of 5.0%.
