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Brokers' take: Analysts lower forecasts on ComfortDelGro due to earnings headwinds

With headwinds expected for FY2020 due to the effect of the Covid-19 outbreak and taxi earnings likely to remain weak, research houses have trimmed their earnings outlook for ComfortDelgro.

WITH headwinds expected for FY2020 due to the effect of the Covid-19 outbreak and taxi earnings likely to remain weak, research houses have trimmed their earnings outlook for ComfortDelgro. 

RHB Research cut the transport operator's forecast earnings for the current financial year by 12 per cent to S$271 million. DBS Group Research lowered bottom-line estimates by 6.2 per cent to S$276 million, while UOB Kay Hian lowered the forecast by 5.5 per cent to S$279.7 million. CGS-CIMB is the least pessimistic of the lot, lowering estimates by 1.6 per cent to S$283.7 million.

The economic impact of the novel coronavirus spread is likely to hit ComfortDelGro's taxi business more than its public transport segment. The former is already facing a declining fleet size and higher idle rates, which RHB's head of Singapore research Shekhar Jaiswal believes "could get worse as taxi drivers earnings are impacted by Covid-19".

He added: "While we expect public transport business to report higher revenue, margins are expected to remain weak in near term."

According to UOB Kay Hian analyst Lucas Teng, negatives from the Covid-19 outbreak appear "priced in", but upside catalysts appear limited at the moment, while the group is still on the lookout for suitable acquisitions.

On Friday, ComfortDelGro posted a 12.6 per cent decline in FY2019 net profit to S$265.1 million due in part to an impairment of S$27.3 million for its taxi business. Revenue for the year ended Dec 31, 2019 rose 2.6 per cent to S$3.9 billion, on new acquisitions and higher contribution from existing businesses.

The final dividend for FY2019 was 5.29 Singapore cents, down from FY2018's 6.15 cents. Total payout for FY2019 was 7.6 per cent lower at 9.79 cents.

Even though analysts said earnings for the period were within expectations, they were largely disappointed with the proposed final payout.

CGS-CIMB analysts Ong Khang Chuen and Cezzane See noted the "key disappointment of the results lies in a lower final dividend".

In a Monday report, DBS Group Research analyst Andy Sim wrote: "While the impact from novel coronavirus (Covid-19) outbreak and taxi rental rebates were within expectations, the impairment provision on its taxi operations and dividend cut threw us off course."

"While core net profit met expectations, the cut in final dividend might suggest a tougher road ahead, especially with the Covid-19 situation," said UOB Kay Hian's Mr Teng.

That being said, ComfortDelGro's ability to generate strong free cash flow and its healthy dividend yield are likely to support share prices going forward, RHB's Mr Jaiswal noted.

The CGS-CIMB analysts are of the same view, believing ComfortDelGro's dividend yield of 4.8 per cent is a key support to share price performance.

Following the transport operator's earnings announced on Friday, DBS Group Research downgraded the company to "hold" with a target price of S$2.26, while RHB Research has a "neutral" recommendation with a price target of S$2.25.

UOB Kay Hian's has a "hold" call with a target price of S$2.15. The brokerage has suggested an entry price of S$1.95.    

Meanwhile, CGS-CIMB, which sees S$1.88 as a better entry point for its clients, has a "hold" call and a target price of S$2.08.

ComfortDelGro shares were down S$0.09 or 4.1 per cent to S$2.09 at the midday break.