Brokers’ take: UOBKH downgrades ComfortDelGro to ‘hold’ on compressed margins
Bernadette Toh
UOB Kay Hian (UOBKH) on Thursday (Feb 2) downgraded ComfortDelGro to “hold” from “buy”, with a lower target price of S$1.38 compared with S$1.59 previously.
The downgrade comes amid concerns over the transport operator’s market leadership in the public bus sector after two of its bus contracts were put up for tender.
The research team is expecting ComfortDelGro subsidiary SBS Transit to lose at least one or both packages, amid the Land Transport Authority’s aim to diversify competition in the public bus sector, which could lead to a 3 per cent and 10 per cent drop in earnings for 2023 and 2024 respectively.
Even if SBS Transit retains both contracts, earnings would still likely drop by 2 per cent for 2023 and 3 per cent for 2024, due to lower margins given higher operating costs and inflationary pressures. A decision for the tenders is expected in Q3 2023.
UOBKH analyst Llelleythan Tan also expects the extension of the ongoing domestic taxi rental rebates to compress taxi margins this year.
The research team was “negatively surprised” by the absence of any increases to ComfortDelGro’s current 5 per cent taxi booking commission rate, initially expected given lower margins.
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Tan expects ComfortDelGro to extend its 15 per cent daily rental rebates to the end of the second quarter this year to retain and attract taxi drivers. He also predicts a rise in the taxi booking commission rate.
Competition for drivers will also heat up as AirAsia Ride hits the Singapore market in the second half of 2023. UOBKH has yet to incorporate ComfortDelGro’s two-year partnership with Gojek into their forecasts, as further details have yet to be announced.
Tan anticipates ComfortDelGro to implement a booking commission system similar to its Zig app which would support taxi earnings.
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Meanwhile, China’s easing of its Covid-19 restrictions will aid in the recovery of point-to-point travel demand. The research team believes the policy shift will benefit ComfortDelGro’s Chinese taxi operations, supporting the company’s 2023 taxi profitability.
To account for the loss of both bus contracts in 2023 and 2024, extended taxi rental rebates, along with weaker overseas contributions due to an appreciating Singapore dollar, UOBKH has trimmed its 2022-24 earnings estimates.
It now forecasts a profits after tax and minority interests of S$179.2 million for FY2023 for ComfortDelGro, from S$186 million previously, as well as S$181.9 million for FY2024, from S$202.9 million previously.
The research team added that ComfortDelGro is trading one time below its book value and is daily valued at current price levels. The group’s shares were trading flat at S$1.20 as at 12.36 pm.
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