Brokers' take: DBS, Maybank KE cut target price for ComfortDelGro

TWO analysts on Tuesday have lowered their target price on the stock of land transport giant ComfortDelGro Corp.

Maybank Kim Eng maintained its "buy" call but reduced the target price to S$1.98 from S$1.99, while DBS Group Research maintained its "hold" call with a new target price of S$1.50 down from S$1.55.

Shares of ComfortDelGro were trading flat at S$1.54 as at 3.54pm on Tuesday.

Maybank Kim Eng reduced its forecast for ComfortDelGro's earnings before interest and tax (Ebit) for the financial year to reflect "a slower pace of decline in operating costs in the taxi and public transport business".

"(The) gradual lifting of social distancing measures remains a key catalyst behind our "buy" (call)," wrote analyst Kareen Chan. 

Ms Chan said ComfortDelGro's first quarter revenue was in line with estimates, but Ebit came in below expectations due to higher-than-expected operating costs in the public transport segment.

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The company saw its public transport services revenue hit by decreased rail ridership in Singapore, a weaker Australian dollar, and fewer routes in the UK as a result of bad weather and the Covid-19 crisis, she added.

Its operating profit margin was further narrowed by the high fixed cost of rail operations, a segment expected to be further hit by the effects of "circuit-breaker" measures implemented in Singapore, Australia and the UK in the second quarter of the year.

Meanwhile, ComfortDelGro's taxi revenue was hit by rental relief schemes in Singapore that began in February, and full-rental waivers for taxis in China during its Covid-19 lockdown.

The segment is expected to suffer further from the two-month full-rental waiver for Singapore taxi drivers in Q2. This rental waiver scheme, which is expected to last until September, will be further reviewed, and an extension of the scheme until December will result in a 2 per cent reduction to the target price, Ms Chan said.

She added, however, that Singapore's taxi business is expected to pick up as social distancing policy eases, echoing a similar recovery in China.

Meanwhile DBS Group Research cut its forecast for ComfortDelGro's earnings to factor in taxi rental waivers, lower rail ridership and bus services provisions, which it said was offset partially by government incentives.

Noting a 39 per cent fall in operating profit, analyst Andy Sim said the public transport segment was "not as immune as previously envisaged", and warned that the company's second-quarter performance would remain impacted by stricter social distancing measures and reduced ridership.

"While there seems to be increasing optimism as the world comes out of a lockdown, we believe recovery could be gradual with continued calls for social distancing and work from home, thus limiting daily commute," Mr Sim wrote.

He added that in the immediate term, the "receding severity of Covid-19 would help to improve market and economic sentiment", with ComfortDelGro seeing potential earnings upgrades from its taxi fleet expansion and/or changes in dynamics bewteen the ride hailing and taxi industry.

However, key risks include the loss of bus contracts, changes in regulations on operations, and "heightened and prolonged irrational competition" from private hire companies, leading to further contraction in the taxi fleet, he said.