Brokers' take: DBS raises ComfortDelGro target price to S$2.06, sees value from unit's potential IPO

DBS Group Research has raised its target price for ComfortDelGro Corporation (CDG) C52 to S$2.06 from S$1.94 previously, with an unchanged "buy" recommendation as it projects value extraction from the transport operator's subsidiary CDG Australia's potential initial public offering (IPO).

In a report on Friday (Nov 8), the research house said it believes that CDG Australia's enterprise value could be worth upwards of A$1.2 billion (S$1.2 billion), on the back of its potential IPO which will see it listed on the Australian Securities Exchange.

A successful IPO should see valuations above 9 times forward enterprise value or earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) for CDG Australia. This translates to a valuation of above S$4.3 billion for CDG, added DBS.

With Grab set to list via a special purpose acquisition company in the US and GoTo possibly looking to see its IPO soon, CDG's private-hire competitors may be subject to increased scrutiny which could reduce aggressive promotions and competition. This indicates that ride-hailing public listings could signal slowing competition cash burn, said DBS.

The research house also pointed out that mobility in Singapore is gradually trending towards normalisation in living with the pandemic, as a result of booster shots, Covid-19 pills and an expansion in hospital bed capacity.

"We expect sequential quarterly improvements in FY2022 led by recovery and pickup of transit mobility," said DBS.

The research house also observed that the gradual lifting of restrictions in the coming months may provide the impetus for CDG's Singapore taxi fleet recovery. DBS forecast FY2022 taxi revenues to rise 14.4 per cent year on year, on the back of a fleet of 9,000 taxis and lower rental waivers. Save for a serious lockdown or aggressive promotions by competitors, DBS forecast FY2022 operating profit to improve to S$60.7 million for the segment.

Separately, public transport service revenue for FY2022 is forecast at S$2.9 billion based on an average daily ridership of 940,000, whereas the Auckland Rail Contract which is set to commence in January 2022 is forecast to contribute between S$3.5 million and SS$7.5 million to CDG's bottom line, said DBS.

The raise in target price to S$2.06 is based on a new sum of the parts (SOTP) valuation methodology, DBS noted. The SOTP is based on 10 times FY2022 EV/EBITDA for CDG Australia, as well as the target prices for SBS Transit and Vicom. Whereas for CDG's remaining businesses the FY2022 EV/Ebitda is at 6.5 times.

The target price represents 1.5 times FY2022 price-to-book ratio which is at the 5-year price-to-book ratio mean of 1.5 times, and is lower than CDG's pre-Covid price-to-book mean of 1.7 times.

DBS reiterated its "buy" call on CDG assuming a "reasonable" enterprise valuation of S$1.3 billion for CDG Australia based on 10 times FY2022 EV/EBITDA, as well as on current market valuations for Vicom and SBS Transit.

CDG's remaining businesses are valued at a "bargain" of 3.9 times the FY2022 EV/Ebitda, based on the current share price of S$1.61, DBS added.

On the flipside, DBS said that key risks for CDG are high Covid-19 hospitalisations and deaths leading to a reversal of Singapore's endemic plans, intense competition from ride-hailing competitors leading to further contraction in taxi fleet, loss of bus contracts, and changes in regulations affecting operations.

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