Eric Ong of Maybank Securities has downgraded ComfortDelGro C52 Corp from "buy" to "hold" in what he says is a "contrarian" call.
Ong's basic premise is that the land transport operator will now incur heavier spending is required with the impending $461 million acquisition of Addison Lee, a taxi operator in UK.
"While this major M&A may be accretive, we have some reservations given the challenging operating and regulatory landscape in the UK," says Ong in his Nov 15 note.
He points out that following the completion of the acquisition, ComfortDelGro will move from a net cash to a net debt position.
The deal marks the company's shift towards asset-heavier business model, and, coupled with Addison Lee’s relatively low ROE and growth prospects given the competitive London taxi industry and drivers' worker status issue.
"Additionally, we think the group is likely to incur more capex on renewal/replacement of taxi vehicles with its larger fleet now, which could adversely impact its free cash flow," reasons Ong, who has a new target price of $1.60 on the stock, from $1.65 previously.
Other analysts have generally maintained their positive view on ComfortDelGro, following its 3QYF2023 update, where earnings improved by 15.2% y-o-y for the three months ended Sept, marking the seventh consecutive quarter of growth.
Shekhar Jaiswal of RHB Bank Singapore notes that while the key Singapore taxi and private hire segment remains soft, the company is working to improve its booking platform and is mulling new features such as cancellation fees already charged by the competition.
Another way to grow this segment is to introduce booking for more premium and larger vehicles, he says, as he keeps his "buy" call and $1.70 target price.
DBS Group Research, in its Nov 15 note, points out that even though ComfortDelGro will go into net debt versus net cash following the acquisition of Addison Lee, will maintain its dividend payout ratio - one of the key attributes of this counter for investors.
Following the series of acquisitions over the last couple of years, the company will now focus on consolidating these new businesses.
"Given the guidance to maintain current payout ratio, this removes an overhanging fear of dividend cuts and shareholders could expect to see continued strong dividend growth in-line with earnings growth," says DBS, which is keeping its "buy" call and $1.80 target price.
In contrast to Maybank's Ong, Ong Khang Chuen of CGS International believes that the acquisition of Addison Lee will add some £8m to the company's earnings per year. In addition to revenue synergies with another UK outfit, CMAC, Addison Lee is a "strategic move" that can help the company expand into "differentiated premium offerings in the point-to-point (P2P) travel segment," says CGS's Ong, who has kept his "add" call and raised his target price from $1.70 to $1.80.
As at 9.55 am, ComfortDelGro shares changed hands at $1.47, down 1.34%.
