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Broker's take: CGS-CIMB initiates on SBS Transit with 'add', upgrades ComfortDelGro

SBS Transit - ST file.jpg
Compared to ComfortDelGro, SBS Transit offers direct exposure to potential catalysts such as bus package tender wins and rail financing policy reform, the analysts said.

CGS-CIMB has initiated coverage on SBS Transit with an "add" call and a target price of S$3.40, saying it is "time to hop on" the stock.

The market has not priced in the bus and train operator's recovery scenario and potential catalysts, analysts Ong Khang Chuen and Darren Ong wrote in a note dated Friday.

Its shares were then trading at 11.7 times price-to-earnings ratio for calendar year 2021, or -0.5 standard deviation below its five-year historical average.

As at 1.17pm on Monday, shares of SBS, which is 74.4 per cent owned by land transport giant ComfortDelGro, rose S$0.06 or 2.2 per cent to trade at S$2.85.

The analysts added that they are the first to initiate coverage on the counter, and prefer SBS to its parent company ComfortDelGro Corp.

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CGS-CIMB believes that operationally, the worst is over for SBS, and expects public transport ridership in Singapore to return to around 90 per cent of pre-Covid levels by FY21. This could drive the recovery of SBS's net profit, which the analysts believe could increase by 35 per cent for the year.

Since the country's "circuit breaker" was lifted in June this year, ridership has steadily improved, rising to 50 per cent of pre-Covid levels in July followed by 55 per cent in August. Singaporeans are also gradually resuming social activities.

"With new local community cases of Covid-19 currently at low levels, we see room for further relaxation of safe-distancing measures, which could potentially spur ridership recovery," the analysts said.

They also view SBS as offering long-term structural growth as it is a beneficiary of Singapore's public policy, which favours public transport over private vehicle ownership.

The company is a market leader in the public bus industry with a 61 per cent market share by bus routes in 2019. This generates defensive earnings and stable cash flow under the bus-contracting model, CGS-CIMB noted.

SBS also operates three of the eight existing rail lines in the Republic as at end-June.

Compared to ComfortDelGro, SBS, being a pure Singapore public transport play, offers direct exposure to potential catalysts such as bus package tender wins - for the Bulim and Sembawang-Yishun bus packages, for instance - as well as rail financing policy reform, the analysts said.

With strong free cash flow generation after the implementation of the bus-contracting model in 2016, SBS has turned into a net cash position by the end of H1 2020.

CGS-CIMB sees upside to the company's dividend payout ratio - which was 50 per cent in FY19 - after earnings normalisation, as ComfortDelGro had a dividend payout ratio of 80 per cent in FY19.

In addition, as the bulk receiver of government relief, SBS could see better earnings protection from pandemic-related social-distancing measures than ComfortDelGro in FY20, in CGS-CIMB's view.

Meanwhile, the brokerage also upgraded ComfortDelGro to "add" from "hold", and raised the stock's target price to S$1.70 from S$1.40.

In another note dated Friday, CGS-CIMB said the counter was trading at 14 times price-to-earnings ratio for calendar year 2021, or 0.6 standard deviation below its historical average, which the research team thinks has yet to fully factor in the recovery scenario.

ComfortDelGro shares were flat at S$1.48 as at 1.18pm on Monday.

CGS-CIMB said it has turned more positive on ComfortDelGro, likewise thanks to the further relaxation of safe-distancing measures, which could help ridership recover.

Analysts Ong Khang Chuen and Cezzane See expect ComfortDelGro's net profit to recover, with a 104 per cent increase in FY21.

"We also see the likelihood that the government could loosen the work-from-home arrangements in the coming months, increasing the mobility of Singaporeans," they added.

The group's taxi segment could return to the black by Q4 2020 with the continued moderation of taxi rebates, in CGS-CIMB's view.

ComfortDelGro previously offered a 40 per cent taxi rental rebate from July 16 to Aug 15, before lowering that to 30 per cent from Aug 16 to Sept 15. And from Sept 16 to Oct 31, all its taxi drivers will receive a 25 per cent rental waiver.

CGS-CIMB's expectation of the taxi segment going back into the black is based on the assumption that ComfortDelGro will not provide additional relief apart from its committed amount for the Special Relief Fund (SRF). The group has committed to at least match the S$10 per day SRF that the government is extending to cabbies till March 2021.

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