Brokers’ take: Analysts lower ComfortDelGro’s target price on Q1 earnings miss

ANALYSTS have lowered their target price for ComfortDelGro (CDG), after the transport operator reported lower-than-expected earnings for the first quarter of 2023 ended March.

RHB slashed the target price for CDG to S$1.25, from S$1.40 previously, while DBS Group Research trimmed its target price to S$1.62, from S$1.66. Both research houses are keeping their “buy” calls on the counter.

Meanwhile, UOB Kay Hian (UOBKH) is maintaining its “hold” recommendation on CDG, and lowering its target price to S$1.27, from S$1.29. 

While CDG’s revenue for Q1 was in line with expectations, RHB analyst Shekhar Jaiswal noted that net profit came in below estimates.

Jaiswal attributed the underperformance to two main reasons: weaker margins in the company’s public transport business, and lower earnings from its taxi business from incentives offered to taxi drivers in China where utilisation levels remain low. 

However, he noted that earnings should gradually improve in the second half of 2023. 

Jaiswal said public transport earnings “seem to have bottomed” and are expected to benefit from the annual indexation of overseas bus contracts. 

With its taxi rental discounts in Singapore cut to 10 per cent from April 2023, from 15 per cent previously, DBS analysts noted that CDG’s taxi business could save approximately S$4 million per quarter.

They added that CDG’s pivot towards a commissions-based business model on its relaunched ride-hailing platform app Zig would help offset input cost pressure.

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In addition, both DBS and RHB pointed out that there was scope to increase CDG’s commission rates for taxi bookings. CDG currently takes a 5 per cent cut, compared to both Grab and Gojek which take a commission of 20 per cent.

Overall, DBS is upbeat on CDG’s taxi business amid expectations that point-to-point operations in Singapore and China, in particular, will improve post-pandemic.

However, the analysts trimmed their forecasted revenue for the taxi business for FY2023 by 4.8 per cent to S$484.1 million and operating profit by 19.7 per cent to S$65.4 million, given a slower-than-expected recovery of CDG’s China business. 

Despite margin pressures on the public transport segment – the result of higher electricity and labour costs – DBS analysts said this would be offset by several factors, including a recovery in the taxi and other business segments. They expected an overall revenue growth of 4.5 per cent.

On the other hand, UOBKH was less optimistic. 

Analyst Llelleythan Tan said CDG’s public transport segment continues to face a “mixed outlook”, with a higher-than-expected loss from the closed tender comprising the Bukit Merah and Jurong West bus packages likely to derail the segment’s recovery. UOBKH incorporated the loss of both packages in its estimates. 

However, Tan said the profitability of the segment is likely to have bottomed out in Q1 2023, with “most of the overhangs cleared”. 

Despite the improving fundamentals, Tan added that CDG’s “near- to medium-term earnings headwinds, margin compression and a lack of catalysts” would cap its share price performance. 

The counter closed S$0.01 or 0.9 per cent higher at S$1.13 on Friday (May 19).