Brokers' take: Olam could replace ComfortDelgro in STI, says CGS-CIMB

TRANSPORT operator ComfortDelGro C52 : C52 0% could drop out of the Straits Times Index (STI) in December when a quarterly review is due, according to CGS-CIMB.

In a note dated Nov 22, analyst Lim Siew Khee said food and agri-business company Olam International O32 : O32 0% is likely to take its place in the index, which tracks the performance of the top 30 companies listed on the Singapore Exchange.

Olam had not featured on the index since it was taken out in September 2015.

Lim takes this belief as ComfortDelGro was ranked 42nd by market capitalisation, at S$3.29 billion as at market close on Monday (Nov 22), compared with Olam, which ranked 23rd at S$6.38 billion.

Besides, ComfortDelGro had weathered "a slew of bad news" recently, with the outcome of two rerating catalysts not matching up to market expectations, she noted.

One of them was the group's announcement that it was considering listing its wholly-owned Australian subsidiary ComfortDelGro Corporation Australia on the Australian Stock Exchange.

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It did not come to fruition, however, as ComfortDelGro announced on Nov 10 that it would ditch the plan, citing more challenging initial public offering (IPO) conditions in Australia since August.

That news had brought CGS-CIMB to remove the company as its top country pick.

Lim believes that being dropped from the STI, coupled with the shelving of the Australian IPO, could cap the counter's share price in the near term.

However, Lim reiterated her "add" call on ComfortDelGro and target price of S$1.80, premised on the brokerage's estimates for its FY2022 earnings. She projects the stock to recover given further relaxation of Covid-19 restrictions in the coming months and ComfortDelGro's cheap valuations.

At the counter's Nov 22 closing price of S$1.52, the stock was trading at about 14.4 times FY2022 earnings estimates, which is 1.5 standard deviation points below its 5-year historical average.

Meanwhile, Lim noted Olam's plans to list its food ingredients business Olam Food Ingredients on the premium segment of the London Stock Exchange in the first half of 2022 - a move which she said would raise capital and unlock the value of its businesses.

The capital raised will allow Olam to pare down its gearing, which stood at 1.6 times as at June 2021, she added.

Shares for Olam were trading at S$1.74 as at 1.45 pm on Tuesday (Nov 23), up S$0.01 or 0.6 per cent, while shares of ComfortDelGro were trading at S$1.51, down S$0.01 or 0.7 per cent.