Brokers’ take: UOBKH upgrades ComfortDelGro to ‘buy’ on transportation rebound

UOB Kay Hian (UOBKH) upgraded ComfortDelGro to “buy” and raised its target price to S$1.41 from S$1.27 previously, as it expects the land transport operator’s earnings to benefit from industry tailwinds.

The new target price implies a 15-times price-to-earnings (P/E) multiple based on FY2024 forecasts, which UOBKH deems in line with the stock’s average long-term P/E multiple.

While UOBKH projects the group’s public-transport segment to report lower revenue and core operating profit in H1 FY2023, the brokerage believes softness in this segment will bottom out in Q2 before improving sequentially.

It forecasts public transport core operating profit to improve by 28 per cent on a half-on-half basis, driven by improved rail ridership, higher rail fares and expected cost indexation from bus packages in the UK from Q2.

The taxi segment, however, presents an upcoming inflection point for ComfortDelGro, said UOBKH in its report on Friday (Jul 14).

This division is expected to register more positive profit margins with reduced taxi rental rebates and a potential increase in commission rates, in addition to its new online booking fee that will roll out on Jul 23.

With a daily taxi rental rebate of 10 per cent to take effect from Q2, down from 15 per cent previously, UOBKH analysts forecast the segment’s Q2 operating profit to rise 80 per cent year on year to S$18 million.

“Moving forward, we expect potential upward revisions for ComfortDelGro’s 5 per cent commission rate in H2 FY2023, given that it is considerably lower, when compared to major competitors Grab (20 per cent) and GoJek (15 per cent),” they added.

Based on the brokerage’s estimates, a 1 per cent increase in commission rate would raise the company’s full-year taxi operating profit by 4 per cent to 5 per cent in FY2023.

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UOBKH’s upgrade came after CGS-CIMB upgraded its call on ComfortDelGro to “buy” from “hold”. On Jul 4, CGS-CIMB raised its target price to S$1.35 from S$1.20, implying a 15.4 times ratio based on its FY2024 earnings estimates.

The research house similarly said it expects rising profits from the taxi segment, with the group’s UK operations to return to profitability in terms of earnings before interest and taxes in FY2023 on the back of government support.

It also flagged the possibility of a higher base dividend payout ratio, given the group’s stronger fundamental performance this year, along with a higher payout from its subsidiary, SBS Transit.

“We think (a) higher dividend payout ratio can be supported, given (ComfortDelGro’s) strong net cash position of S$715 million and cash-flow generation,” said analyst Ong Khang Chuen.

ComfortDelGro was trading 1.7 per cent or S$0.02 higher at S$1.23 as at the midday break on Friday.