SINGAPORE (June 5): The unprecedented “circuit breaker” measures in Singapore has caused most of commuter traffic to disappear. It has also sent ComfortDelGro shares down 32% year to date to close at $1.61 on June 3. For the land transport giant — which operates taxis, buses and trains — the Covid-19 outbreak was an unprecedented challenge for a business which for years has been seen as one of the more defensive stocks to own.
On May 29, the transport heavyweight was also axed from the MSCI Singapore index in its semi-annual review, which added to the woes of existing shareholders. Shares tumbled 4% over the course of that day alone with 255.7 million shares worth $374.1 million changing hands, as fund managers rebalance their holdings in line with the index.
While the circuit breaker period has essentially been a “doom and gloom” scenario for ComfortDelGro, its fortunes could change soon. Singapore has now scaled back some of its restrictions in a “partial reopening”, allowing more businesses and schools to resume operations. With more people commuting, market watchers say this could indicate a “potential recovery” for ComfortDelGro. Some analysts have also changed their minds about the company, and over the past week they have turned bullish on the counter — a reversal from the more sombre projections previously.
DBS and RHB are two brokerages that have turned positive on the stock, given its attractive valuations and prospects of a recovery that is starting earlier than expected. “We believe that the odds of ComfortDelGro’s share price appreciation over the next six to 12 months outweighs downside risks,” says DBS Group Research analyst Andy Sim. On June 1, Sim upgraded his call from “hold” to “buy”, along with a higher target price of $1.68, from $1.50 previously. The new target price is pegged to 16.8 times the average of FY2020 and FY2021’s earnings. “Further target price upside could come as we move towards the end of FY2020F, and, or with better clarity in terms of pace of recovery.”
1Q bleeds, 2Q weak
ComfortDelGro’s 1QFY2020 numbers for the quarter ended March — amid the circuit breaker measures — was its worst quarter since 2003 when Comfort and DelGro merged to form the listed entity known today. ComfortDelGro has expanded significantly since the union, it now operates in seven countries and has a global fleet of over 41,600 vehicles. However, earnings for the quarter was halved to $36 million, on the back of a 9% y-o-y drop in revenue to $862.4 million. All its business segments suffered declines: Segmentally, revenue from its taxi business fell 25.7%, while contributions from the public transport services segment fell 4.2%. Other segments, such as automotive engineering services and inspection and testing services fell 22.3% and 0.8% respectively.
While the bulk of its businesses are in Singapore, ComfortDelGro also generates sizable revenue from its operations in the UK, Australia and China. But there is no hiding from the global pandemic: In Singapore, ridership numbers fell by 70-75% during the circuit breaker period. In the UK, where it runs taxis and buses, business suffered from lower tourist numbers and route count. In Australia, the weaker Aussie dollar weighed down on the Singapore dollar-accounted earnings more than necessary.
Analysts warn that the company’s 2QFY2020 earnings will remain uninspiring. Maybank Kim Eng analyst Kareen Chan says the company’s public transport segment will be “further hit” by the effects of circuit breaker measures implemented by its key markets. In addition, Chan — who rates this stock “buy” with a price target of $1.98 — notes that ComfortDelGro’s taxi segment will see further impact from its two-month full-rental waiver for local cabbies in 2QFY2020.
CGS-CIMB analyst Ong Khang Chuen believes that cabbies’ earnings will take at least three to six months to normalise, given the weak tourism sector and continued safe distancing measures put in place to counter the virus. “We do not rule out a further extension of the rental rebates, as it is crucial for ComfortDelGro to retain its taxi fleet through this Covid-19 crisis,” says Ong in his May 25 note. He has a “hold” call and $1.50 target price on this stock.
On May 28, ComfortDelGro announced that it will halve its rental fees for the month of June instead of extending a full waiver for a third month. The extension of full taxi rental waivers announced on Apr 22 had brought ComfortDelGro’s total relief package given to its cabbies estimated at more than $119 million, which it had earlier warned will bring the Singapore taxi business this financial year into the red.
On the other hand, the company’s bus operations are “fairly stable”. This is because of the bus contracting model which is applicable to ComfortDelGro’s bus operations in Australia, as well as Singapore, via its separately-listed subsidiary SBS Transit. Instead of consolidating, the company is looking to bid for three new route tenders in Sydney.
Water under the bridge
DBS’s Sim says 2QFY2020 and FY2020 earnings, however ugly, will well be “water under the bridge” as the economy picks up. Sim estimates ComfortDelGro’s earnings to rebound by 38% in FY2021. RHB Group Research analyst Shekhar Jaiswal, on the other hand, has a more conservative estimate of 26% growth. He rates the stock a “buy” from “neutral” previously, along with a price target of $1.65.
Apart from expectations of higher public transport revenue as the frequency of bus and train services reverts to normal and with more people travelling, cash flow support doled out by the government from all four Budgets unveiled this year could lend some support to the company. For instance, Jaiswal notes that the extension of job support schemes for an additional month, as well as a higher percentage support to cover monthly wages for rail and point-to-point operators, should enable the company to “weather through the next two reporting quarters.”
If investors are worried about a further decline in ComfortDelGro’s share price, Jaiswal says weak 2QFY2020 earnings and the exclusion from the MSCI Index have already been priced in, and its FY2020 dividend yield now matches the yield offered by the benchmark Straits Times Index (STI). While analysts say there could still be some residual selling over the next few days, near term downside for the counter remains limited.
“A faster-than-expected opening of the economy could be a share price catalyst, and we believe the “worst could be over” mentality could cause the market to cast aside worries of a “largely-known” and weak 2Q2020 operating performance,” says DBS’s Sim.
Even with the phased reopening of the economy, Sim expects a 30% drop in ridership for the rail operations run by SBS Transit. With more people making working from home a norm, Sim expects average daily ridership of just 820,000, down from 1.19 million in FY2019. With social-distancing requirements, operators will be required to keep running at a certain frequency so as to avoid overcrowding, even though actual ridership numbers are down. As such current fare levels may not be sustainable, says Sim.
“This suggests there could be a rethink on public transport fares which bodes well for SBS Transit’s rail operations. However, this may not take place in the immediate term given the current economic challenges and difficulties faced by the population due to Covid-19,” he adds.
Time to buy?
In addition to organic recovery, the post-Covid-19 environment might throw up chances outside home market Singapore for ComfortDelGro to continue growing by making acquisitions. The company’s revenue from overseas operations was 42% of the total in the most recent FY2019, up from 35% back in FY2003. Operating profit from overseas operations was 34% of the total in FY2019, up from 26% a decade ago. Sim says the company’s management had previously indicated a target of increasing the proportion of revenue from overseas such that it is an even split with Singapore revenue.
The company now has net cash of some $26.4 million and available facilities of another $704.7 million. Gearing remains low, with gross debt-to-equity at around 0.2 times while net debt-to-equity is near zero. “This provides ComfortDelGro with ample headroom for overseas acquisitions to supplement growth and further diversify its geographical exposure out of Singapore,” says Sim.
Amid all these developments, two institutional investors have however reacted in opposite directions. On May 29, asset manager Pyrford International — part of BMO Global Asset Management — paid more than $10 million for some 6.68 million ComfortDelGro shares, bringing its total stake in the company to 5.05% from the previous 4.74% and making it the company’s newest substantial shareholder. On the other hand, American asset manager BlackRock on June 1 sold 540,500 ComfortDelGro shares for a total cost of $778,320. This lowered its stake from 6.01% to 5.98%.
Even as substantial shareholders appear to have different views, there are persistent fears that a second wave of infections might send economies back into drastic lockdowns again. Analysts warn that better clarity will only come towards the end of FY2020, which would provide a better estimate of recovery. Risks for ComfortDelGro include prolonged irrational competition from private-hire cars: In the face of aggressive market expansion by the likes of Grab and Gojek, ComfortDelGro’s Singapore taxi fleet has dropped from the peak of 16,800 as at December 2016 to around 10,600 as of March. While the conventional taxis and private-hire apps can co-exist, the competitive pressure will remain.
