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Brokers' take: ComfortDelGro upgraded to 'add' by CGS-CIMB

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Brokers continue to eye a turnaround story in transport giant ComfortDelGro (CDG), despite its second-quarter profit decline last Friday.

BROKERS continue to eye a turnaround story in transport giant ComfortDelGro (CDG), despite its second-quarter profit decline last Friday.

To be sure, the profit dip was in line with street estimates, as higher revenue from CDG's bus and rail businesses and contributions from new acquisitions helped it offset lower taxi profits for the second quarter.

CDG shares fell 2.94 per cent to S$2.31 as at noon on Monday, although three brokers have raised their target price after last Friday's results, with CGS-CIMB upgrading CDG from a "hold" to "add" after a transfer of analyst coverage.

CGS-CIMB analyst Colin Tan raised the broker's target price for CDG to S$2.75 from $2.37 based on a discounted cash-flow model, factoring higher profit contributions from its acquisition spree and an impending earning recovery in the taxi business.

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"We think CDG's taxi fleet is set for a return to growth in the second half of 2018 and could scale back up to 13,000 by the end of the year," Mr Tan wrote. As at end June, CDG’s taxi fleet stood at 12,535. CDG said it will take delivery of 200 new hybrid taxis this month, and has placed orders for 1,000 more taxis to be delivered by mid-2019.

Mr Tan added: "CDG has steadily raised its dividend payout from 50 per cent in 2010 to about 75 per cent in 2017 and we expect the group to maintain a similar 75 per cent payout level in our forecast period, which would yield a 4.4-4.9 per cent dividend yield for 2018 to 2020." 

PhillipCapital analyst Richard Leow kept CDG at "accumulate", but raised his target price to S$2.78 from $2.69 after tweaking his assumptions for contribution from acquisitions. 

"About 47 per cent of CDG's 5.4 per cent revenue increase to S$941 million in the second quarter was attributable to recent acquisitions," Mr Leow noted. As well, the taxi fleet idle rate of 2 per cent in the second quarter was lower than the 3-5 per cent during 2017, he wrote.

However, Mr Leow also flagged that the growth in CDG's operating expenses have outpaced revenue, which may have been due to the transition of the North-East Line, Punggol LRT and Sengkang LRT to the new rail financing framework from April 1.

While some analysts have noted that ComfortDelGro's net cash position of S$220 million as at end June puts it in good position to acquire more businesses, Mr Leow also noted that goodwill on the group's books has risen 16.4 per cent so far this year as a result of acquisitions.

Mr Leow wrote: "Goodwill now accounts for 10.5 per cent of total assets, compared to the 10-year historical average of 5.5 per cent. The increase in goodwill is an effect of inorganic growth, and we estimate it to reach 11.7 per cent of total assets by the end of 2018, in line with the group’s aggressive acquisition strategy."

UOB Kay Hian also kept its "buy" call on CDG and raised its target price to S$2.59 from S$2.43 after a transfer of analyst coverage.

UOB Kay Hian analyst Foo Zhiwei wrote: "Our target price is pegged to 16.8 times 2019 forward PE (price-to-earnings), reflecting CDG’s long-term mean PE since 2012. Positives have largely been priced in, and upside will stem from better-or earlier-than-expected operational improvements from the public transport and taxi businesses."

Mr Foo added: "Dividend yield remains attractive at about 4.4 per cent, and its defensive nature will provide share price support, with a total return of 13 per cent."