Broker’s Call: ComfortDelGro Stock Offers Investors Attractive Valuation, Maintain Add

October 14, 2022

CGS-CIMB Analyst take

Singapore’s stock market has been somewhat of a haven amid the storm of headwinds buffeting the global economy and stock markets.

That’s because the city state’s economy is recovering fast after reopening and benefitting from a return to normalcy in terms of consumer behaviour.

One of the key beneficiaries of this trend has been local transport giant ComfortDelGro Corporation Ltd (SGX: C52).

Its sizeable operations in Singapore, via its taxi fleet and various MRT lines it operates, has seen the company recover well from the Covid-19 pandemic shock.

The research team at CGS-CIMB Securities maintains our “ADD” call on ComfortDelGro but cuts our target price to S$1.56 (from S$1.75 previously).

For investors looking for a steady and defensive business, then here’s what you should know about ComfortDelGro.

Singapore rail ridership approaches 90% of pre-Covid levels

As we’re probably all aware, mobility services in Singapore have roared back so far in 2022 as the economy reopens.

That has seen ComfortDelGro’s daily rail ridership recover – as of August 2022 – to 88% of its 2019 levels.

Meanwhile, a mismatch between demand and supply saw both ride-hailing and taxi fares remain at high levels during the third quarter. These were up around 30% year-on-year.

That’s improved drivers’ net earnings and has allowed the company to raise its commission rate for app bookings to 5% earlier this month (versus 4% previously).

Yet that’s still a lot lower than the driver commission rates charged by competitors GoJek (10% until end of 2022) and Grab (20%).

Forex headwinds could dampen overseas recovery

While we expect overseas operational improvements to continue in the latest quarter, there are also headwinds.

These include recent weakness in the Australian Dollar and British Pound and could lead to a negative foreign exchange (FX) translation impact.

Naturally, that could provide a dampener over the company’s earnings recovery in H2 2022. That’s because overseas operations contributed about 43%/28% of ComfortDelGro’s revenue/core operating profit in H1 2022.

Taking into account the forex headwinds and potential near-term margin pressure, we lower our FY2022-2024 forecast earnings per share (EPS) by 2.0-7.6%.

Defensive pick with 13.6% free cash flow yield; reiterate our Add rating

Bar the Covid-19 pandemic period, ComfortDelGro stock has outperformed the MSCI Singapore Index over the past five periods of economic weakness over its 18-year history as a listed company.

We attribute this to its defensive business model (public transportation, vehicle inspection and testing services) as well as its strong balance sheet.

We reiterate our ADD rating as we expect further earnings recovery as the company’s key geographies return to a “new normal”.

Our S$1.56 target price is based on a lower FY2023 forecast price-to-earnings (PE) ratio of 15.9x (its five-year historical average) from 16.8x previously.

Re-rating catalysts to the upside include further adjustments to taxi monetisation and tender win announcements.

Meanwhile, downside risks include prolonged Covid restrictions in China.

Disclaimer: CGS-CIMB Securities SMID Analyst KC Ong doesn’t own shares of any companies mentioned.