Brokers’ take: CGS-CIMB downgrades ComfortDelGro on lower margins
CGS-CIMB has downgraded ComfortDelGro to “hold” from “add”, with a lower target price of S$1.30 compared with S$1.36 previously, after the transport operator released its Q3 FY2022 results.
The downgrade and target price cut were based largely on the company’s lower margins, as “inflationary pain” and higher costs offset gains driven by ridership recovery.
ComfortDelGro on Monday (Nov 14) posted increases in its revenue and profit after taxes and minority interests (Patmi), but the numbers still “disappointed” analyst Ong Khang Chuen. The company’s 9M FY2022 core net profit of S$121 million came in at just 67 per cent of Ong’s forecast for the period, due to “wider-than-expected” cost impacts.
In a report issued Tuesday, the analyst noted that ComfortDelGro’s public transport segment was “hurt” by heightened inflation and increased labour costs in Q3 due to driver shortages and higher-fee agency workers.
As a result, the operator’s margins were lowered even as its taxi business recovered strongly to reverse a loss from Q3 FY2021. The taxi segment posted earnings before interest and taxes of S$16 million for Q3 FY2022, compared to a loss of S$6 million the year before.
Ong believed cost and inflationary pressures will continue narrowing margins in the second half of the financial year, despite ComfortDelGro actively engaging regulators to contain wage costs. In his view, relief is likely to come only in FY2023.
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The analyst said the slower pace of recovery risks near-term earnings on the stock, leading him to downgrade it. He also lowered earnings per share (EPS) projections for FY2022 to FY2024 by 11.7 per cent to 16.3 per cent on lower margin assumptions.
The revised target price of S$1.30 represents a lower price-to-earnings ratio (PE) of 13.8 times the FY2024 forecast, as Ong rolled over his valuation base year. The revised PE is also 1.5 standard deviations below ComfortDelGro’s five-year historical average.
UOB Kay Hian (UOBKH), Maybank Securities and DBS Group Research have also cut their target prices for the land transport operator, but all three research houses maintained “buy” on the stock on Tuesday.
UOBKH analyst Llelleythan Tan lowered the target price slightly to S$1.59 from S$1.63, citing “razor-thin margins” for the quarter. The new target price reflects lower market valuations for ComfortDelGro’s SBS Transit and Vicom stakes, and implies a PE of 17 times FY2022 estimates.
Taking into account higher operating costs, the analyst also cut his Patmi forecasts for FY2022 to S$194.9 million from S$227.8 million.
However, he continued to like ComfortDelGro for being well-positioned to recover in the medium term. He reiterated “buy” on the stock, as relaxed Covid-19 measures and the resumption of international travel continue to boost ridership levels.
Maybank analyst Eric Ong cut his target price for the operator to S$1.60 from S$1.75, after lowering his FY2022 to FY2024 EPS forecasts by 15 per cent. They are based on ComfortDelGro’s 9M earnings falling below expectations to come in at 71 per cent of his full-year estimate.
“We attribute the miss entirely to the group’s public transport services, especially its overseas operations, given the elevated costs and foreign exchange headwinds,” said the analyst.
However, Maybank’s Ong expressed optimism about the company’s recent bus contract wins in Sydney, which are worth roughly A$1.7 billion (S$1.5 billion). He said they will contribute about S$12 million to the operator’s earnings before interest and taxes per full financial year.
The analyst continued to like ComfortDelGro for its “solid” balance sheet and “strong” free cash flow. He maintained “buy” on the stock.
DBS analyst Andy Sim also lowered his target price to S$1.85 from S$1.95, after he trimmed his FY2022 and FY2023 earnings forecasts by 5 per cent and 9 per cent respectively on the operator’s higher costs and lower margins.
He added that the cost pressures from ComfortDelGro’s overseas operations were a “negative surprise”, and he expects these weaknesses to continue in Q4 FY2022.
The analyst nonetheless continued to rate the stock as “buy” as he believes that the market has yet to price in ComfortDelGro’s recovery.
Sim pointed out that valuations for the counter remain at historical lows even though the transport operator’s key markets – Singapore, Australia and the UK – have already moved towards living with Covid-19. In his view, it is only a matter of time before “normalised” mobility trends are reflected in the company’s operating performance.
ComfortDelGro shares were trading 4.4 per cent or S$0.06 lower at S$1.30 as at 11.58 am.
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