 • Some 20 years ago, ComfortDelGro was formed from the merger of a taxi operator and a bus-cum-taxi operator, both in Singapore. Their combined resources have successfully led to new overseas business. Not surprising -- since they have honed their competence in running Singapore's public transport system at world-class standards. • ComfortDelGro, now a S$3.2 billion company listed on the Singapore Exchange, operates in 8 key markets and operates a global fleet of about 40,000 vehicles. • The overseas operations are in the UK, Australia, New Zealand, China, Ireland, Malaysia and France. In the UK, ComfortDelGro operates a fleet size of close to 4,000 -- and it has just announced a new slew of contracts. This follows from a January 2024 achievement (see: COMFORTDELGRO: Gets to operate Swedish rail -- and NZ and France rail too) Expect ComfortDelGro to continue to seek out further opportunities everywhere. Think: China, where ComfortDelgro operates a fleet of close to 10,000 vehicles. Read UOB KH's latest take on the company .... |
Excerpts from UOB KH report
Analysts: Llelleythan Tan & Heidi Mo
ComfortDelGro Corporation (CD SP)
| Backed By Favourable Tailwinds |
CD’s wholly-owned UK subsidiary has been awarded four new public bus contracts.
We also highlight several points from CD’s responses to shareholder questions. In view of improving fundamentals and a lush 5.5% dividend yield, we maintain BUY and a higher target price of S$1.72. CD remains one of our conviction picks for 1H24. |
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(note: "indexation" term mentioned below -- this involves adjusting fares, subsidies, or contractual payments to reflect changes in economic indicators. This is to balance service provision with economic viability)
WHATS NEW
• Strong end to 1Q24. As predicted in our previous report, ComfortDelGro Corporation’s (CD) Mar 24 (+6.1% yoy) rail ridership has surpassed 2019 pre-pandemic levels for the third consecutive month at 101.4% of 2019 levels.
On a quarterly basis, 1Q24 rail ridership was also higher (+8.8% yoy, +6.2% qoq), surpassing 2019 levels by 2.0% for the first time after the pandemic.
Backed by higher rail fares implemented in Dec 23 along with increased margins from ongoing UK bus contract renewals, we maintain our expectations that CD’s public transport services segment would post higher revenue and profitability for 1Q24.
• Awarded UK bus contracts. CD announced that its wholly-owned subsidiary, Metroline Limited, has been awarded contracts to operate four public bus franchises by the Greater Manchester Combined Authority for a period of five years with options to be extended for two one-year terms starting Jan 25.
These franchises will comprise a total of 232 different services served by 420 buses and over 1,350 employees, adding twice as many services and a 30 percent increase over its London portfolio.
In our view, this is positive for CD as these four packages are worth approximately S$720m over five years.
Assuming 8% operating margins and an even allocation over five years, this equates to roughly S$12m in operating profit growth and would increase our 2025-26 PATMI estimates by around 3-4%.
STOCK IMPACT
CD recently released answers to several shareholder questions ahead of its annual general meeting on 26 Apr 24. We summarise and highlight some points below.
• Stable taxi utilisation. CD noted that the unhired rate for its Singapore taxi fleet typically stands at less than 5% of the group’s total fleet. This is in line with expectations – we understand that the unhired rate has remained around 3% post-pandemic.
• Rail segment likely unprofitable for now. Due to the commercial sensitivity of CD’s rail segment, the group was unable to clarify on the rail segment’s profitability. Based on our estimates, we reckon that CD’s rail segment remains unprofitable in 2023.
According to CD’s rail competitor SMRT Corporation (SMRT), SMRT Trains posted an operating profit of S$6.1m for 2023. Given that CD has a lower annual rail ridership than SMRT and that the Downtown line posted an operating loss of S$46.1m pre-pandemic, we estimate that CD’s rail segment was still unprofitable in 2023 at around S$15m operating loss.
However, with the higher rail fares implemented in Dec 23, we expect margins for the CD’s rail segment to improve and reach near break-even levels in 2024.
• Better UK prospects. In line with our expectations, CD noted that revenue and profitability from the group’s UK operations are expected to improve on the back of upcoming cost indexations and ongoing higher bus contract renewals.
Looking back to 3Q23 (see chart overleaf) when most of CD’s UK bus contracts cost indexations started to come through, the UK segment reversed four consecutive quarters of operating losses to a quarterly operating profit of S$6.1m.
Also, we understand that about 20% of UK bus contracts are expected to undergo contract renewals at higher service fees in the next two to three quarters which would help boost margins for the UK segment in our view. A return to pre-pandemic operating profits could potentially boost our 2024 overall annual operating profit by around 7-8%.
EARNINGS REVISION/RISK
• We increase our 2025-26 PATMI estimates by 3-4%, as we factor in contributions from the new UK public bus contracts.
Our 2024-26 PATMI forecasts are S$233.1m (unchanged), S$259.7m (S$251.0m previously) and S$281.4m (S$275.6m previously) respectively.
VALUATION/RECOMMENDATION Llelleythan Tan, analyst• Maintain BUY with a higher target price of S$1.72 (S$1.66 previously), pegged to 16x 2024F PE (15x 2024F PE previously), CD’s five-year average long-term PE (10-year average long-term PE previously). • With improving fundamentals, a lush 5.5% dividend yield and a robust balance sheet, we reckon that most negatives have already been priced in. Despite the recent strong share price performance, we opine that there is still upside at current price levels. Backed by upcoming favourable tailwinds, we reckon that better sequential earnings improvement for CD for 1Q24 would help support share price performance in 1H24. |
SHARE PRICE CATALYST
• Bus tender contract wins, increase in taxi commission rates and earnings-accretive overseas acquisitions
Full report here
