Brokers’ take: CGS-CIMB lowers ComfortDelGro target price amid forex headwinds

CGS-CIMB continues to back ComfortDelGro (CDG) for its defensiveness, although it warned that a weakened Australian dollar and pound sterling could dampen revenue from overseas operations.

The research house maintained its “add” rating for the counter, but cut its target price from S$1.75 to S$1.56, implying a downside of 23.8 per cent from its closing price of S$1.26 on Wednesday (Oct 12).

The new target price is based on a lower FY2023 price-to-earnings ratio of 15.9 times compared to 16.8 times previously. 

In a report on Wednesday, analyst Ong Khang Chuen said he expects CDG’s overseas profits to be affected by forex (foreign exchange) headwinds – potentially putting a damper on its projected earnings recovery in H2 2022. 

Given that the group’s Australia and UK operations contributed an aggregated 43 per cent of CDG’s revenue in H1 2022, Ong warned that a 10 per cent and 15 per cent respective depreciation of the Australian dollar and British pound against the Singapore dollar. This could in turn lead to a potential 3.6 per cent decline on CDG’s overall operating profit, he said. 

“Taking into account forex headwinds and potential near-term margin pressure from rising inflation, we lower our FY2022 to FY2024 earnings per share (EPS) by 2 per cent to 7.6 per cent. We still forecast a sequential core net profit improvement in H2 2022 to S$94 million (+9 per cent half-on-half, +50 per cent year-on-year),” said Ong.

In all, the analyst continued to view CDG as a good defensive pick, and expects further earnings recovery as CDG’s key geographies return to a “new normal”. 

Ong said that CDG will benefit from the strong mobility recovery in Singapore. He noted that with the resumption of office work and nightlife, CDG’s daily rail ridership has returned to 88 per cent of its 2019 levels, exceeding CGS-CIMB’s projections of 85 per cent by end-2022.  

Aside from strong demand as evident from high fare prices in Q3 as well as improved net driver earnings, Ong said he liked the stock for its proven defensiveness and strong balance sheet.

SEE ALSO

ComfortDelGro dropped from STI, replaced by liquor giant Emperador

Public transport fares to rise by 2.9%; hike capped at 5 cents per journey

“Trading at 2 standard deviation below historical mean (12.9 times FY2023 price-to-earnings ratio), we believe the market has more than priced in the negatives from recent developments (i.e. CDG’s exclusion from the Straits Times Index on Sep 19, recent Great Britain pound volatility, and expectations of interest rates staying higher for longer),” said Ong. 

Meanwhile DBS has also maintained its “buy” rating for CDG with a target price of S$1.95, and said that the counter’s share price retreat below that of Covid-19 levels appears unwarranted in light of the strong mobility recovery. 

The research house said that the upcoming December public transport fare hike announced by the Singapore Public Transport Council (PTO) will have no impact on CDG subsidiary SBSTransit’s bus operations due to its bus contracting model. 

The fare hike is also expected to have a relatively muted impact on SBSTransit’s rail operations, which are now shielded from commercial volatility due to functioning under the New Rail Financing Framework (NRFF) since Jan 1 2022.