Broker's take: DBS raises ComfortDelGro to 'buy' on potential fleet and earnings growth

A POTENTIAL increase in its taxi fleet, coupled with projected profit growth in fiscal 2019, has moved DBS Group Research to upgrade transport operator ComfortDelGro's from 'hold' to 'buy' with a target price of S$2.59, a 13 per cent upside from its previous target.

The stock was trading at S$2.32 as at 10.58 am on Wednesday.

DBS upgraded its recommendation on the back of a bottoming out in taxi fleet contraction in Singapore with potential increase, and an earnings upside revision from further acquisitions.

"Looking into Q2 2018, while we still expect the group to post year-on-year declines in profits, we expect them to be of a smaller magnitude vis-à-vis that seen in Q1 2018, suggesting improvement in operations," the broker wrote in a research note.

DBS projected operations to improve sequentially in the second half of 2018, with profits envisaged to increase by 5 per cent per annum from fiscal 2019, compared to a three per cent decline in fiscal 2018.

It also projects ComfortDelGro's taxi fleet to grow to 13,000 by the close of 2018.

"With competition ceding, we believe downside risks are limited, coupled with its public transport exposure which is relatively resilient through economic cycles."

The possible entry of Go-Jek's entry into Singapore - together with speculation that Go-Jek could partner ComfortDelGro - could catalyse the local transport operator's share price, by being an additional avenue for ComfortDelGro to be within the private hire car space, DBS said.

Go-Jek's entry could also complement ComfortDelGro's existing taxi business, as well as other ancillaries like automotive engineering, insurance and vehicle inspection.

DBS noted its estimates were at the "lower end of consensus" due to a more conservative view on taxi fleet size and rail contribution leading to a marginal contraction in its forecast for ComfortDelGro's financial year 2018 earnings.

Key risks to the stock which could impact the forecast include the loss of bus contracts, a continued slump in the taxi fleet, changes in regulations on operations, heightened competition and currency swings, DBS said.