SINGAPORE (May 18): Maybank Kim Eng has reinitiated coverage on ComfortDelGro with a “buy” call and price target of $1.99, thanks to its “defensive” revenue model, decent yield, and growth prospects over the long term.
While CDG’s taxi business has been hurt from the Covid-19 outbreak, that’s a relatively small proportion, or 17%, of FY2019 revenue.
On the other hand, some 63% of CDG’s revenue from FY2019 came from fixed contracts for operating bus services, where the revenue isn’t tied to passenger numbers.
In her May 17 note, MBKE analyst Kareen Chan estimates that for every month’s extension of the measures, CDG’s profit after tax would be trimmed by just 0.3%.
With Covid-19 infection rates down by more than half from the peak, chances are the measures will not be extended past June 1 and if so, will be an “upside catalyst”.
To be sure, the Covid-19 outbreak has hurt CDG. The company has earlier flagged that its Singapore taxi business will be loss-making. Chan estimates that since February, the company has chalked up some $115 million worth rental rebates or rental waived.
Nevertheless, the post Covid-19 operating environment is seen to be more favourable than previously.
Chan notes that the competition between CDG and the private hire vehicles, operating on the “super-Apps’” platforms, is moderating, as they are channelling more energy trying to expand in higher margin, non-transportation markets.
“In addition, lower fuel costs due to falling oil prices and government subsidies should reduce operating expenditure pressure in the near term,” says Chan.
In the longer term, Singapore’s land transport policies, with a view towards environmental sustainability considerations, remain skewed in favour of public transport over private car ownership. “Singapore is committed to zero-car growth for example,” she says.
In addition, CDG has the appetite to borrow and make overseas acquisitions, including bus operators under a similar contract-fee framework, says Chan.
She notes that if CDG is to spend $1 billion on such acquisitions, its net gearing would increase to 25%. As at end FY2019, its net gearing was just 1.3%. The company management is comfortable to borrow and raise this level to 40%.
Revenue from overseas operations accounted for 42% of CDG’s FY2019 total. Chan estimates overseas revenue to overtake domestic revenue by FY2023, which will further diversify CDG’s revenue stream and offer less volatility.
Chan estimates CDG’s earnings per share to drop from 12.2 cents in FY19 to 8 cents for the current FY20, but to rebound to 11.2 cents the following year.
Chan expects CDG to cut its FY20 dividend from 9.8 cents to just 4.8 cents, which is pegged to a conservative dividend payout ratio assumption of 60%. Over the past five years, the same ratio has averaged at 73%. Chan notes that at this level, the dividend payout still translates into a yield of 3.3%, which is 220 basis points higher than 10-year Singapore government bonds.
The historical post-crisis performance of this stock should give investors some confidence as well. According to Chan, following the 2003 Sars outbreak and the 2008-2009 Global Financial Crisis, CDG’s share price rebounded by 75% and 90% respectively, in the following eight to ten months.
CDG shares closed last Friday at $1.46, down 38.4% year-to-date.
