Broker's take: Maybank KE issues 'buy' on ComfortDelGro, sees 'increasingly defensive' earnings

MAYBANK Kim Eng (Maybank KE) has reinitiated coverage on ComfortDelGro Corp with a "buy" call and a target price of S$1.99, citing an "increasingly defensive" revenue base and structural growth.

Shares of the land transport giant - which has interests in taxi, bus and rail globally - were trading at S$1.51 by the midday break on Monday, up S$0.05 or 3.4 per cent.

For one, analyst Kareen Chan said ComfortDelGro offers "significant exposure" to a long-term structural theme. Maybank KE believes longer-term public policy - such as Singapore's commitment to zero-car growth - as well as environmental, social, and governance (ESG) imperatives will continue to favour public transport over private vehicle ownership. 

The company also has a strong track record of accretive mergers and acquisitions in overseas markets, Ms Chan said in a research note on Monday.

In terms of ComfortDelGro's "defensive" revenue base, she noted that 63 per cent of its revenues in 2019 were secured by stable bus-contracting models (BCMs) that are not affected by volatile passenger numbers arising from Singapore's "circuit breaker" amid the coronavirus outbreak.

Under the Republic's BCM scheme, the government owns all buses, bus infrastructure such as depots, as well as the fleet management system. The Land Transport Authority (LTA) retains fare revenue but pays fixed fees and performance bonuses to bus operators including ComfortDelGro's 75 per cent-owned subsidiary SBS Transit.

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Thanks to the BCM contracts underpinning the bulk of ComfortDelGro's revenues, every one-month extension of Singapore's "circuit breaker" will only reduce the company's profit after tax slightly, by just 0.3 per cent, Maybank KE estimated.

Overseas, a primary focus of ComfortDelGro's acquisitions has also been on public transport operators with BCM-like revenue schemes, especially in its major markets such as Australia, Ms Chan said.

She thus estimated that the "stable" overseas revenue contributions are set to overtake domestic revenue by around 2023, which will further improve earnings visibility and reduce earnings risks through increased diversity.

As for ComfortDelGro's train business, Maybank KE said prospects look "brighter" in the long term.

The research team expects railway revenue to grow and Ebit (earnings before interest and tax) loss from the railway business to narrow as its operating leverage improves.

The Singapore railway business remains the main drag in ComfortDelGro's public transport segment, mainly because the Downtown-Line (DTL) ridership has been lower than what LTA forecast.

"But the gap between forecast and actual ridership has been closing rapidly in the past two years. The Covid-19 'circuit breaker' will reverse this trajectory in 2020 or so, but structurally the ridership gaps should dissipate in a normalised operating environment as riders start adopting DTL as their preferred route," Ms Chan wrote.

ComfortDelGro runs four railway lines through SBS Transit: the North East Line, DTL, Punggol LRT and Sengkang LRT.

Ms Chan said that the existing railway revenue model is unlikely to be sustainable if the government wants increased participation of private operators in future railway projects.

As a result, Maybank KE expects future railway contracts to adopt a framework similar to the bus industry's BCM, to provide better operating visibility for private players. "This would be a catalyst for ComfortDelGro as it will bid for new railway projects, and it should further reduce group revenue volatility," Ms Chan added.

Aside from public transport which contributes nearly half of ComfortDelGro's Ebit, the taxi segment accounts for about 30 per cent of Ebit.

The taxi industry is showing signs of stabilisation with regulators levelling the playing field, while ride-hailing companies such as Grab and Gojek are shifting their focus to other businesses, Maybank KE noted.

"Competition between taxis and private hire super-apps is moderating as (ride-hailing firms look) to expand in higher-margin, non-transportation segments," Ms Chan said.