SINGAPORE (May 26): Although most companies are increasingly optimistic as the world emerges from a lockdown, market watchers say ComfortDelGro’s (CDG) recovery could be “gradual” at best.
As such, brokerages have taken to adjusting the company’s earnings estimates to factor in a bleak outlook.
Both RHB Group Research analyst Shekar Jaiswal and DBS Group Research analyst Andy Sim have slashed their FY2020 earnings forecasts for the company by 19% and 7% respectively, while Maybank Kim Eng Research analyst Kareen Chan has reduced FY20E EBIT margin forecast by 50 basis points to reflect a slower pace of decrease in operating costs.
CGS-CIMB Research analyst Ong Khang Chuen has lowered his FY2020 earnings per share (EPS) forecast by 3.4%, to factor in higher taxi rental rebates and lower service fees and ridership for public transportation.
DBS’s Sim says continued calls for social distancing and work from home arrangements are likely to limit daily commute, affecting Singapore’s largest taxi operator directly.
“The next few months would still be challenging for CDG particularly its taxi operations as well as subdued public transport services,” he says.
Sim also notes that the company is slated to be excluded from the MSCI Singapore Index from May 29, and could still put significant pressure on the counter’s share price as index-based funds move to reduce their near-term exposure.
To be sure, 1QFY2020 was far from a good one for CDG, missing analysts forecasts due primarily to the Covid-19 pandemic. The company reported earnings of $36.0 million, some 48.9% lower than earnings of $70.4 million a year ago.
This came on the back of a 9% slide in revenue to $862.4 million from $947.3 million last year as all business segments booked declines due to the Covid-19 pandemic.
See: ComfortDelGro's 1Q earnings dive 49% to $36 mil, lockdowns to 'significantly hurt' 1H business
Specifically, while analysts had been bracing themselves for contractions in taxi and China operations, CDG’s public transport segment had posted a deeper drop than analysts had envisioned.
“Fall in public transport services revenue were mainly affected by a decrease in rail ridership in Singapore, bad weather and Covid-19 impact in the UK resulting in fewer routes, as well as weaker AUD,” says Maybank Kim Eng’s Chan.
“Operating profit margin was narrowed by high fixed cost in rail operations,” adds Chan.
Looking ahead, analysts say CDG’s negative financials are likely to continue through 2QFY2020 as the Covid-19 pandemic continues to rage on. In particular, the company’s taxi segment is likely to remain the “key drag.”
“Even after the circuit breaker measure is lifted in Singapore, we believe cabbies’ earnings will take at least 3-6 months to normalise given the weak tourism sector and continued safe distancing measures by the government,” says CGS-CIMB Research’s Ong.
“We do not rule out a further extension of the rental rebates, as it is crucial for CDG to retain its taxi fleet through this Covid-19 crisis,” he adds.
RHB’s Jaiswal adds that the company’s public transport business is likely to record lower earnings in 2QFY2020 due to declines in MRT ridership and reduction in bus frequencies.
“While Covid-19 mostly impacted overseas businesses negatively in 1QFY2020, its effect on Singapore businesses, or 60% of revenue, will be visible in 2QFY2020,” says Jaiswal.
“With expected near term earnings weakness and likely slow recovery in business to pre-Covid-19 levels, we see limited catalysts to turn positive on earnings and share price outlook,” he adds.
However, Jaiswal notes that CDG’s net cash balance sheet of $26.4 million could be “put to good use” at a time like this, especially since the company does not expect to undertake any new capital expenditure for the rest of the year.
In addition, Jaiswal says CDG also has available facilities of some $700 million to undertake an “accretive acquisition.”
DBS, RHB and CGS-CIMB are reiterating their “hold” calls on CDG. Both DBS and CGS-CIMB have lowered their target prices for the stock to $1.50, representing a downside of 2.9%. Meanwhile, RHB’s target price of $1.45 represents a 6% downside for the counter.
Maybank has bucked the trend with a “buy” call on CDG, terming the company to be a “beneficiary of post-Covid-19” with a taxi business that will be “on its path of recovery” as social distancing policies ease. The brokerage has a target price of $1.98 on the stock, representing a 29% upside.
Shares in ComfortDelGro have sunk some 35% year-to-date, and are trading flat at $1.54 as at 1.38pm.
