Brokers’ take: RHB lowers ComfortDelGro target on reduced earnings estimates
Janice Tan
RHB has lowered ComfortDelGro’s target price to S$1.65 from S$1.80 as a result of lowering earning estimates to 5-9 per cent for FY2022-FY2024. This is due to reduced taxi and public transport earnings expectations.
The brokerage nonetheless remains “buy” on the stock as it continues to favour the land transport operator for its undemanding valuation, strong free cash flow (FCF) generation capability, and potentially higher dividend payout.
In a report on Friday (Jan 13), analyst Shekhar Jaiswal said the lower price target could be partly attributed to a downward revision in ComfortDelGro’s taxi earnings estimates for FY2023. And that, in turn is a result of the group’s recent move to extend its 15 per cent daily rental waiver for taxi drivers in Singapore until Mar 31, 2023. Jaiswal noted also the move to also keep commission fees unchanged. In contrast, when the waiver was extended last year, the commission rate for call bookings was raised from 4 per cent to 5 per cent.
The analyst expects ComfortDelGro to face margin pressure in its public transport business due to weakness in its overseas public transport operations
To recap, the UK public transport business reported higher operating costs in Q3 of FY2023, as well as a mismatch in the timing and correlation of contract cost indexation. ComfortDelGro also indicated that this timing mismatch could persist in the fourth quarter of 2022 as well.
Therefore, RHB has lowered its public transport margin estimate for Q4 of FY2022 and the early part of FY2023.
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While Jaiswal highlighted the possibility of continued margin pressures in the group’s recent extension of bus contracts in both Singapore and Australia, this risk has yet to be reflected in RHB’s estimates.
Despite these observations, Jaiswal said ComfortDelGro’s Singapore taxi service and its public transport should see elevated demand, especially with the reopening of China which will result in higher tourist inflow.
In his view, the stock is trading at a “compelling valuation” at current levels as its forward forward price-to-earnings ratio that is well below its ten-year average.
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“The group’s net cash balance sheet and strong FCF generation could mean higher dividends,” he added.
Shares for ComfortDelGro were down 0.9 per cent or S$0.01 at S$1.17 as at 9.59 am on Friday.
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